UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
FOR THE QUARTERLY PERIOD ENDED
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER
_________________________________________________________
(Exact name of registrant as specified in its charter)
_________________________________________________________
| |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
(Address of principal executive offices) | (Zip code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of Each Class: | Trading symbol(s) | Name of Each Exchange on Which Registered: |
Securities registered pursuant to Section 12(g) of the Act: None
________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer |
| ☐ | Accelerated filer |
| ☐ | |
☒ | Smaller reporting company | |||||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of May 12, 2022, there were
TABLE OF CONTENTS
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, 2022 |
| December 31, 2021 | |||
ASSETS |
|
|
|
| ||
CURRENT ASSETS |
|
|
|
| ||
Cash and cash equivalents |
| $ | | $ | | |
Accounts receivable, net |
|
| |
| | |
Prepaid expenses and other current assets |
|
| |
| | |
Total current assets |
|
| |
| | |
Goodwill |
| |
| | ||
Intangible assets, net (Note 3) |
| |
| | ||
Deferred financing costs, net (Note 2) |
| |
| | ||
Operating lease - right-of-use assets |
| |
| — | ||
Other long-term assets |
| |
| | ||
Total assets | $ | | $ | | ||
LIABILITIES AND MEMBERS' EQUITY |
|
|
|
| ||
CURRENT LIABILITIES: |
|
|
|
| ||
Accounts payable | $ | | $ | | ||
Accrued liabilities |
| |
| | ||
Notes payable, current portion |
| |
| | ||
Deferred revenues |
| |
| | ||
Operating lease liabilities, current portion |
| |
| — | ||
Related party payables (Note 7) |
| - |
| | ||
Total current liabilities |
| |
| | ||
Notes payable, net of short-term portion and deferred financing cost of $ |
| |
| | ||
Mandatorily redeemable non-participating preferred units |
| — |
| | ||
Line of credit |
| |
| | ||
Paycheck Protection Program loan |
| |
| | ||
Economic Injury Disaster Loan |
| |
| | ||
Operating lease liabilities, net of current portion |
| |
| — | ||
Total liabilities |
| |
| | ||
COMMITMENTS AND CONTINGENCIES (Note 8) |
|
|
|
| ||
STOCKHOLDERS’ / MEMBERS' EQUITY (DEFICIT) |
|
|
|
| ||
Units, |
| — |
| | ||
Class A common stock, $ |
| |
| — | ||
Class B common stock, $ |
| |
| — | ||
Additional paid-in capital |
| |
| — | ||
Accumulated deficit |
| ( |
| ( | ||
Total stockholders’ / members' equity (deficit) |
| |
| ( | ||
Total liabilities and stockholders’ / members' equity | $ | | $ | |
See accompanying notes to the unaudited consolidated financial statements.
3
DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended March 31, | |||||
| 2022 |
| 2021 | |||
Revenues |
|
|
|
| ||
Buy-side advertising |
| $ | | $ | | |
Sell-side advertising |
|
| |
| | |
Total revenues |
|
| |
| | |
Cost of revenues |
|
|
|
|
| |
Buy-side advertising |
|
| |
| | |
Sell-side advertising |
|
| |
| | |
Total cost of revenues |
|
| |
| | |
Gross profit |
| |
| | ||
Operating expenses |
|
|
|
| ||
Compensation, taxes and benefits |
|
| | | ||
General and administrative |
|
| | | ||
Total operating expenses |
|
| | | ||
Income (loss) from operations |
|
| | ( | ||
Other income (expense) |
|
|
|
| ||
Other income |
|
| | | ||
Forgiveness of Paycheck Protection Program loan |
| — |
| | ||
Loss on redemption of non-participating preferred units |
| ( |
| — | ||
Interest expense |
| ( |
| ( | ||
Total other expense |
| ( |
| ( | ||
Tax expense |
| — |
| — | ||
Net loss | $ | ( | $ | ( | ||
Net loss per common share / unit: |
|
|
|
| ||
Basic and diluted | ( | ( | ||||
Weighted-average number of common shares / units outstanding: |
|
|
|
| ||
Basic and diluted |
| |
| |
See accompanying notes to the unaudited consolidated financial statements.
4
DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ / MEMBERS’ EQUITY (DEFICIT)
(Unaudited)
|
|
|
| Common Shares |
|
|
| Accumulated |
| Members' | ||||||||||||||
Common Units | Class A | Class B | equity | equity | ||||||||||||||||||||
| Units |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| APIC |
| (deficit) |
| (deficit) | |||||||
Balance, December 31, 2020 | $ | — | $ | — | — | $ | — | $ | — | $ | ( | $ | | |||||||||||
Distributions to members |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Balance, March 31, 2021 |
| | $ | |
| — | $ | — |
| — | $ | — | $ | — | $ | ( | $ | |
|
|
| Members' / | |||||||||||||||||||||
Common Shares |
|
|
| Accumulated |
| Stockholders' | ||||||||||||||||||
Common Units | Class A | Class B | equity | equity | ||||||||||||||||||||
| Units |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| APIC |
| (deficit) |
| (deficit) | |||||||
Balance, December 31, 2021 | | $ | | — | $ | — | — | $ | — | $ | — | $ | ( | $ | ( | |||||||||
Issuance of Class A common shares, net of transaction costs |
| — |
| — |
| |
| |
| — |
| — |
| |
| — |
| | ||||||
Conversion of member units to Class B shares |
| ( |
| ( |
| — |
| — |
| |
| |
| ( |
| — |
| — | ||||||
Redemption of common units |
| ( |
| ( |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||
Distributions to members |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| — | — |
| ( |
| ( | |||||||
Balance, March 31, 2022 |
| — | $ | — |
| | $ | |
| | $ | | $ | | $ | ( | $ | |
See accompanying notes to the unaudited consolidated financial statements.
5
DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Three Months Ended March 31, | |||||
| 2022 |
| 2021 | |||
Cash Flows (Used In) Provided By Operating Activities: |
|
| ||||
Net loss |
| $ | ( | $ | ( | |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
| |||||
Amortization of deferred financing costs |
|
| |
| | |
Amortization of intangible assets |
|
| |
| | |
Amortization of right-of-use asset |
| |
| — | ||
Forgiveness of Paycheck Protection Program loan |
| — |
| ( | ||
Paid-in-kind interest |
|
| — | | ||
Loss on redemption of non-participating preferred units |
|
| | — | ||
Bad debt expense recovery |
|
| ( | — | ||
Changes in operating assets and liabilities: |
| |||||
Accounts receivable |
|
| | | ||
Prepaid expenses and other current assets |
|
| | ( | ||
Accounts payable |
|
| ( | ( | ||
Accrued liabilities |
|
| | | ||
Deferred revenues |
|
| ( | | ||
Operating lease liabilities | ( | — | ||||
Related party payable |
|
| ( | — | ||
Net cash (used in) provided by operating activities |
|
| ( | | ||
Cash Flows Provided By (Used In) Financing Activities: |
|
|
|
| ||
Proceeds from issuance of Class A common shares, net of transaction costs |
|
| | — | ||
Payments on term loan |
|
| ( | ( | ||
Payment of deferred financing costs |
|
| ( | — | ||
Redemption of non-participating preferred shares |
|
| ( | — | ||
Redemption of common units |
|
| ( | — | ||
Distributions to members |
|
| ( | ( | ||
Net cash provided by (used in) financing activities |
|
| | ( | ||
Net (decrease) increase in cash and cash equivalents |
|
| ( | | ||
Cash and cash equivalents, beginning of the period |
| |
| | ||
Cash and cash equivalents, end of the year | $ | | $ | | ||
Supplemental Disclosure of Cash Flow Information: |
|
|
|
| ||
Cash paid for taxes | $ | — | $ | — | ||
Cash paid for interest | $ | | $ | | ||
Non-cash Financing Activities: |
|
|
|
| ||
Transaction costs related to issuances of Class A shares included in accounts payable and accrued liabilities | $ | | $ | — | ||
Common unit redemption balance included in accrued liabilities | $ | | $ | — |
See accompanying notes to the unaudited consolidated financial statements.
6
DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Organization and Description of Business
Direct Digital Holdings, Inc. and its subsidiaries, incorporated as a Delaware corporation on August 23, 2021 and headquartered in Houston, Texas, is an end-to-end, full-service programmatic advertising platform primarily focused on providing advertising technology, data-driven campaign optimization and other solutions to underserved and less efficient markets on both the buy- and sell-side of the digital advertising ecosystem. Direct Digital Holdings, Inc. is the holding company for Direct Digital Holdings, LLC (“DDH LLC”), which is, in turn, the holding company for the business formed by DDH LLC’s founders in 2018 through the acquisition of Huddled Masses, LLC (“Huddled Masses”) and Colossus Media, LLC (“Colossus Media”). Colossus Media operates our proprietary sell-side programmatic platform operating under the trademarked banner of Colossus SSP TM (“Colossus SSP”). In late September 2020, DDH LLC acquired Orange142, LLC (“Orange142”) to further bolster its overall programmatic buy-side advertising platform and to enhance its offerings across multiple industry verticals such as travel, healthcare, education, financial services, consumer products and other sectors with particular emphasis on small and mid-sized businesses transitioning into digital with growing digital media budgets. In February 2022, Direct Digital Holdings, Inc. completed an initial public offering of its securities and, together with DDH LLC, effected a series of transactions (together, the “Organizational Transactions”) whereby Direct Digital Holdings, Inc. became the sole managing member of DDH LLC, the holder of
The subsidiaries of Direct Digital Holdings, Inc. are as follows:
|
| Advertising |
|
| ||||
Solution | Date | |||||||
Current % | and | of | ||||||
Subsidiary |
| Ownership |
| Segment |
| Date of Formation |
| Acquisition |
Direct Digital Holdings, LLC |
| | % | N/A | June 21, 2018 | August 26, 2021 | ||
Huddled Masses, LLC |
| | % | Buy-side | November 13, 2012 | June 21, 2018 | ||
Colossus Media, LLC |
| | % | Sell-side | September 8, 2017 | June 21, 2018 | ||
Orange142, LLC |
| | % | Buy-side | March 6, 2013 | September 30, 2020 |
Both buy-side subsidiaries, Huddled Masses and Orange142, offer technology-enabled advertising solutions and consulting services to clients through multiple leading demand side platforms (“DSPs”). Colossus SSP is a stand-alone tech-enabled, data-driven platform that helps deliver targeted advertising to diverse and multicultural audiences, including African Americans, Latin Americans, Asian Americans and LGBTQ+ customers, as well as other specific audiences.
Providing both the front-end, buy-side operations 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.
Note 2 — Basis of Presentation and Summary of Significant Accounting Policies
Basis of presentation
The Company’s consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect the financial position, results of operations and cash flows for all periods presented.
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards otherwise applicable to public companies until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) it affirmatively and irrevocably opts out of the extended
7
transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. The adoption dates discussed below reflect this election.
Basis of consolidation
The consolidated financial statements include the accounts of Direct Digital Holdings, Inc. and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
Business combinations
The Company analyzes acquisitions to determine if the acquisition should be recorded as an asset acquisition or a business combination. The Company accounts for acquired businesses using the acquisition method of accounting under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations, (“ASC 805”), which requires that assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The fair value of the consideration paid, including any contingent consideration as applicable, is assigned to the underlying net assets of the acquired business based on their respective fair values based on widely accepted valuation techniques in accordance with ASC Topic 820, Fair Value Measurement, as of the closing date. Any excess of the purchase price over the estimated fair values of the net tangible assets and identifiable intangible assets acquired is recorded as goodwill.
Significant judgments are used in determining the estimated fair values assigned to the assets acquired and liabilities assumed and in determining estimates of useful lives of long-lived assets. Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future net cash flows, estimates of appropriate discount rates used to calculate the present value of expected future net cash flows, the assessment of each asset’s life cycle, and the impact of competitive trends on each asset’s life cycle and other factors. These judgments can materially impact the estimates used to allocate acquisition date fair values to assets acquired and liabilities assumed, and the resulting timing and amounts charged to, or recognized in, current and future operating results. For these and other reasons, actual results may vary significantly from estimated results.
Use of estimates
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 and 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. Significant estimates include the allocation of purchase price consideration in the business combination and the related valuation of acquired assets and liabilities, intangible assets, and goodwill impairment testing. 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.
Cash and cash equivalents
Cash and cash equivalents consist of funds deposited with financial institutions and highly liquid instruments with original maturities of three months or less. Such deposits may, at times, exceed federally insured limits. As of March 31, 2022, $
Accounts receivable
Accounts receivable primarily consists of billed amounts for products and services rendered to customers under normal trade terms. The Company performs credit evaluations of its customers’ financial condition and generally does not require collateral. Accounts receivables are stated at net realizable value. The Company began insuring its accounts receivable with unrelated third-party insurance companies in an effort to mitigate any future write-offs and establish an allowance for doubtful accounts as deemed necessary for accounts not covered by this insurance. As of March 31, 2022 and December 31, 2021, the Company’s allowance for doubtful accounts was $
8
collect the full amount, the Company records the remaining
Concentrations of credit risk
The Company has customers on both the buy-and sell-side of its business. The following table sets forth our consolidated concentration of accounts receivable:
| March 31, |
| December 31, |
| |
| 2022 |
| 2021 |
| |
Customer A |
| | % | | % |
Customer B |
| | % | | % |
Customer C |
| | % | | % |
Property and equipment, net
Property and equipment are recognized in the consolidated balance sheets at cost less accumulated depreciation and amortization. The Company capitalizes purchases and depreciates its property and equipment using the straight-line method of depreciation over the estimated useful lives of the respective assets, generally ranging from
The cost of repairs and maintenance are expensed as incurred. Major renewals or improvements that extend the useful lives of the assets are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed, and any resulting gain or loss is recognized in the consolidated statements of operations.
Goodwill
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. 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 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, 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. Goodwill is reviewed annually and tested for impairment upon the occurrence of a triggering event.
As of March 31, 2022, goodwill was $
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 and recorded as amortization expense within general and administrative expenses in our consolidated statements of operations.
Impairment of long-lived assets
The Company evaluates long-lived assets, including property and equipment, and acquired intangible assets consisting of customer relationships, trademarks and trade names, and non-compete agreements, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is assessed based on the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Any impairment loss, if indicated, is measured as the amount by which the carrying
9
amount of the asset exceeds its estimated fair value and is recognized as a reduction in the carrying amount of the asset. As of March 31, 2022 and December 31, 2021, there were no events or changes in circumstances to indicate that the carrying amount of the assets may not be recoverable.
Fair value measurements
The Company follows ASC 820-10, Fair Value Measurement, (“ASC 820-10”), which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and requires certain disclosures about fair value measurements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the most advantageous market for the asset or liability in an orderly transaction. Fair value measurement is based on a hierarchy of observable or unobservable inputs. The standard describes three levels of inputs that may be used to measure fair value.
Level 1 — Inputs to the valuation methodology are quoted prices available in active markets for identical securities as of the reporting date;
Level 2 — Inputs to the valuation methodology are other significant observable inputs, including quoted prices for similar securities, interest rates, credit risk etc. as of the reporting date, and the fair value can be determined through the use of models or other valuation methodologies; and
Level 3 — Inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity of the securities and the reporting entity makes estimates and assumptions relating to the pricing of the securities, including assumptions regarding risk.
We segregate all financial assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.
Deferred financing costs
The Company records costs related to its line of credit and the issuance of debt obligations as deferred financing costs. These costs are deferred and amortized to interest expense using the straight-line method over the life of the debt. In December 2021, the Company amended its line of credit with East West Bank (see Note 5 – Long Term Debt) and incurred additional deferred financing costs of $
In December 2021, the Company entered into an agreement with Lafayette Square Loan Servicing, LLC (“Lafayette Square”) (see Note 5 – Long Term Debt) and incurred additional deferred financing costs of $
Right-of-use assets
The Company adopted Accounting Standards Update (“ASU”) 2016-02 (“ASU 2016-02”), Leases (Topic 842) as of January 1, 2022, and recognizes operating lease assets and lease liabilities on the balance sheets. The standard requires us to increase our assets and liabilities by equal amounts through the recognition of Right-of-Use (“ROU”) assets and lease liabilities for our operating leases and to recognize the initial and the monthly payments as operating expenses when paid or accrued on our consolidated statements of operations and consolidated statements of cash flows.
Revenue recognition
The Company adopted FASB 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 its financial position or results of operations using the modified retrospective method. The Company recognizes revenue using the following five steps:
● | Identification of a contract(s) with a customer; |
10
● | Identification of the performance obligation(s) in the contract; |
● | Determination of the transaction price; |
● | Allocation of the transaction price to the performance obligation(s) in the contract; and |
● | Recognition of revenue when, or as, the performance obligation(s) are satisfied. |
The Company’s revenues are derived primarily from two sources: buy-side advertising and sell-side advertising.
Buy-side advertising
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 and a self-serve 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. 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”). 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. Performance objectives are generally a measure of targeting, as defined by the parties in advance, such as number of ads displayed, consumer clicks on ads or consumer actions (which may include qualified leads, registrations, downloads, inquiries or purchases). These payment models are commonly referred to as CPM (cost per impression), CPC (cost per click) and CPA (cost per action). The majority of the Company’s contracts are flat-rate, fee-based contracts.
In instances where the Company contracts 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 the Company is acting as the principal or an agent in the transaction. The Company is acting as the principal in these arrangements and therefore revenue earned and costs incurred are recognized on a gross basis as the Company has control and is responsible for fulfilling the advertisement delivery, establishing the selling prices and delivering the advertisements for fully managed revenue and providing updates and performing all billing and collection activities for the self-serve proprietary platform.
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 $
Sell-side advertising
The Company partners with publishers to sell advertising inventory to the Company’s existing buy-side clients, as well as its 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. 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 sell-side platform (“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 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. The Company recognizes revenue when an ad is delivered in response to a winning bid request from ad buyers. The Company is acting as the principal in these arrangements and therefore revenue earned and costs incurred are recognized on a gross basis, as the Company has control and is responsible for fulfilling the advertisement delivery, establishing the selling prices and delivering the advertisements for fully managed revenue and providing updates and performing all billing and collection activities for its self-serve proprietary platform.
11
The Company maintains agreements with each DSP in the form of written service agreements, which set out the terms of the relationship, including payment terms (typically
The following table sets forth our concentration of revenue sources as a percentage of total revenues on a consolidated basis.
| For the Three Months | ||||
Ended | |||||
March 31, | |||||
| 2022 |
| 2021 |
| |
Customer A | | % | | % | |
Customer D |
| | % | | % |
Customer E |
| | % | | % |
Customer F |
| | % | | % |
Cost of revenues
Buy-side advertising
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.
Sell-side advertising
The Company pays publishers a fee, which is typically a percentage of the value of the ad impressions monetized through the Company’s 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.
Advertising costs
The Company expenses advertising costs as incurred. Advertising expense incurred during the three months ended March 31, 2022 and 2021 was $
Income taxes
Effective February 15, 2022, concurrent with the closing of the Company’s initial public offering, the Company entered into a tax receivable agreement (“Tax Receivable Agreement” or “TRA”) with DDH LLC and Direct Digital Management, LLC (“DDM”). The Tax Receivable Agreement provides for certain income (loss) allocations between the Company and DDH, LLC under the agreement. DDH LLC is a limited liability company and will continue to be treated as a partnership for federal income tax purposes and, as such, generally will not be 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 will be allocated to holders of LLC Units in accordance with the TRA, and distributions to the owners of LLC Units in an amount sufficient to fund their tax obligations will be made. 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 TRA. 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 interests are redeemed or exchanged by the members of DDH, LLC. The Company plans to make an election under Section 754 if the Code for each taxable year in which a redemption or exchange of LLC interest occurs. As of March 31, 2022, no redemptions or exchanges have been made by the members of DDH, LLC.
The Company applies ASC 740-10, Income Taxes (“ASC 740-10”), in establishing standards for accounting for uncertain tax positions. The Company evaluates uncertain tax positions with the presumption of audit detection and applies a “more likely than not” standard to evaluate the recognition of tax benefits or provisions. ASC 740-10 applies a two-step process to determine the amount of tax benefits or provisions to record in the consolidated financial statements. First, the Company determines whether any amount may be recognized and then determines how much of a tax benefit or provision should be recognized. As of March 31, 2022 and December 31, 2021, the Company had
12
conclusions regarding uncertain tax positions may be subject to review and adjustments at a later date based upon ongoing analyses of tax laws, regulations and interpretations thereof as well as other factors.
Segment information
Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker is its Chairman and Chief Executive Officer. The Company views its business as
Risks and uncertainties
Management is currently evaluating the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position and results of its operations, the specific impact is not readily determinable as of the date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The new lease guidance supersedes Topic 840. The core principle of the guidance is that entities should recognize the assets and liabilities that arise from leases. Topic 840 does not apply to leases to explore for or use minerals, oil, natural gas and similar nonregenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”, which provides entities with an alternative modified transition method to elect not to recast the comparative periods presented when adopting Topic 842. The Company adopted Topic 842 as of January 1, 2019, using the alternative modified transition method, for which, comparative periods, including the disclosures related to those periods, are not restated. In addition, the Company elected practical expedients provided by the new standard whereby, the Company has elected to not reassess its prior conclusions about lease identification, lease classification, and initial direct costs and to retain off-balance sheet treatment of short-term leases (i.e., 12 months or less and does not contain a purchase option that the Company is reasonably certain to exercise). Refer to “Note 10 - Commitments and Contingencies” to our consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q for additional information.
In March 2020, the FASB issued ASU No. 2020-04: Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides temporary optional expedients and exceptions to U.S. GAAP on contract modifications, hedging relationships, and other transactions affected by reference rate reform to ease entities’ financial reporting burdens as the market transitions from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made, hedging relationships entered into, and other transactions affected by reference rate reform, evaluated on or before December 31, 2022, beginning during the reporting period in which the guidance has been elected. Management is currently evaluating the impact of this update, but does not expect this update to have a material impact on the Company’s financial statements.
Liquidity and capital resources
As of March 31, 2022, the company had cash and cash equivalents of $
13
Note 3 — Intangible Assets
Effective September 30, 2020, the Company acquired
Intangible assets and the related accumulated amortization and future amortization expense are as follows:
| Trademarks and | Non-compete | ||||||||||
| Customer lists |
| tradenames |
| agreements |
| Total | |||||
Fair value at acquisition date | $ | | $ | | $ | | $ | | ||||
Accumulated amortization |
| ( |
| ( |
| ( |
| ( | ||||
Intangibles, net as of March 31, 2022 | $ | | $ | | $ | | $ | | ||||
Estimated life (years) |
|
|
|
|
| |||||||
Weighted-average remaining life (years) at March 31, 2022 |
|
|
|
|
|
| Total | ||
2022 |
| | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Thereafter |
| | |
Total | $ | |
The Company expects to deduct goodwill for tax purposes in future years. The factors that make up goodwill include entry into new markets not previously accessible and generation of future growth opportunities.
Note 4 — Accrued Liabilities
Accrued liabilities consisted of the following:
| March 31, |
| December 31, | |||
| 2022 |
| 2021 | |||
Accrued compensation and benefits | $ | | $ | | ||
Accrued litigation fees |
| |
| | ||
Accrued expenses |
| |
| | ||
Accrued interest |
| |
| | ||
Total accrued liabilities | $ | | $ | |
As of March 31, 2022, accrued expenses includes $
Note 5 — Long-Term Debt
Revolving Line of Credit - East West Bank
On September 30, 2020, the Company entered into a credit agreement that provides for a revolving credit facility with East West Bank in the amount of $
14
availability of $
In connection with the amendment, the Company incurred additional deferred financing fees of $
The Revolving Credit Facility is secured by senior liens on all or substantially all of the assets of DDH LLC and its subsidiaries, including a priority lien on the trade accounts receivable of DDH LLC and its subsidiaries. The Revolving Credit Facility includes financial covenants, and as of March 31, 2022 and December 31, 2021, the Company was in compliance with all of its financial covenants.
The components of interest expense and related fees for the lines of credit are as follows:
| For the Three Months | |||||
Ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
Interest expense – East West Bank | $ | | $ | | ||
Amortization of deferred financing costs |
| |
| | ||
Total interest expense and amortization of deferred financing costs | $ | | $ | |
Accrued and unpaid interest as of March 31, 2022 and December 31, 2021 for the Revolving Credit Facility was $
2020 Term Loan Facility and 2021 Credit Facility
In conjunction with the acquisition of Orange142 on September 30, 2020, the Company entered into a loan and security agreement (the “2020 Term Loan Facility”) with SilverPeak in the amount of $
The obligations under the 2020 Term Loan Facility were secured by first-priority liens on all or substantially all assets of DDH LLC and its subsidiaries. The 2020 Term Loan Facility contained a number of financial covenants and customary affirmative covenants. In addition, the 2020 Term Loan Facility included a number of negative covenants, including (subject to certain exceptions) limitations on (among other things): indebtedness, liens, investments, acquisitions, dispositions, and restricted payments. Each of Mark Walker (“Walker”), Chairman of the Board and Chief Executive Officer, and Keith Smith (“Smith”), President, provided limited guarantees of the obligations under the 2020 Term Loan Facility.
The maturity date of the 2020 Term Loan Facility was September 15, 2023; however, on December 3, 2021, DDH LLC entered into the Term Loan and Security Agreement (the “2021 Credit Facility”) with Lafayette Square and used the proceeds to repay and terminate the 2020 Term Loan Facility.
Lafayette Square
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 $
15
2021 Credit Facility bear interest at LIBOR plus the applicable margin minus any applicable impact discount. The applicable margin under the 2021 Credit Facility is determined based on the consolidated total net leverage ratio of the Company and its consolidated subsidiaries, at a rate of
The obligations under the 2021 Credit Facility are secured by senior liens on all or substantially all assets of DDH LLC and its subsidiaries and are guaranteed by the subsidiaries of DDH LLC. The 2021 Credit Facility is subject to an intercreditor agreement pursuant to which the lenders under the Revolving Credit Facility have a priority lien on the trade accounts receivable of DDH LLC and its subsidiaries that constitute eligible accounts under the Revolving Credit Facility and related proceeds, and the lenders under the 2021 Credit Facility have a priority lien on all other collateral. In connection with the entry into the 2021 Credit Facility, we paid off in full and terminated the 2020 Term Loan Facility. As of March 31, 2022, the Company owed a balance on the 2021 Credit Facility of $
The components of interest expense and related fees for the 2020 Term Loan Facility and 2021 Credit Facility are as follows:
| For the Three Months | |||||
Ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
Interest expense – SilverPeak | $ | — | $ | | ||
Interest expense - Lafayette Square |
| |
| — | ||
Amortization of deferred financing costs -SilverPeak |
| — |
| | ||
Amortization of deferred financing costs – Lafayette Square |
| |
| — | ||
Total interest expense and amortization of deferred financing costs | $ | | $ | |
U.S. Small Business Administration Loans
Economic Injury Disaster Loan
In 2020, the Company applied and was approved for a loan pursuant to the Economic Injury Disaster Loan (“EIDL”), administered by the U.S. Small Business Administration (“SBA”). The Company received the loan proceeds of $
Accrued and unpaid interest expense as of March 31, 2022 and December 31, 2021 was $
Paycheck Protection Program
In 2020, the Company applied and was approved for a loan pursuant to the Paycheck Protection Program (“PPP”), administered by the SBA (the “PPP-1 Loan”). The PPP was authorized in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and was designed to provide a direct financial incentive for qualifying business to keep their workforce employees. The SBA made PPP loans available to qualifying businesses in amounts up to 2.5 times their average monthly payroll expenses, and loans should be forgivable after a “covered period” (eight or twenty-four weeks) as long as the borrower maintains its payroll and utilities.
The forgiveness amount will be reduced if the borrower terminates employees or reduces salaries and wages more than 25% during the covered period. Any unforgiven portion is payable over two years if issued before, or five years if issued after, June 5, 2020 at an
16
interest rate of 1.0% with payments deferred until the SBA remits the borrower’s loan forgiveness amount to the lender, or if the borrower does not apply for forgiveness, then months after the end of the covered period.
DDH LLC received the PPP-1 Loan proceeds of $
On April 11, 2022, the Company received notification that its PPP Loan of $
As of March 31, 2022, future minimum payments related to long-term debt is as follows for the years ended December 31:
2022 |
| $ | |
2023 |
|
| |
2024 |
|
| |
2025 |
|
| |
2026 |
|
| |
Thereafter |
| | |
Total |
| | |
Less current portion |
| ( | |
Less deferred financing costs |
| ( | |
Long-term debt, net | $ | |
Note 6 — Mandatorily Redeemable Preferred Units
ASC 480, Distinguishing Liabilities from Equity, (“ASC 480”), defines mandatorily redeemable financial instruments as any financial instruments issued in the form of shares that have an unconditional obligation requiring the issuer to redeem the instrument by transferring its assets at a specified or determinable date (or dates) or upon an event that is certain to occur. A mandatorily redeemable financial instrument shall be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity. Under ASC 480, mandatorily redeemable financial instruments shall be measured initially at fair value.
In connection with the acquisition of Orange142, DDH LLC issued mandatorily redeemable preferred units which are only redeemable for a fixed amount of cash at a date specific to each class. Due to the mandatory redemption feature, ASC 480 requires that these preferred units be classified as a liability rather than as a component of equity, with preferred annual returns being accrued and recorded as interest expense.
Class A Preferred Units
In connection with the Orange142 acquisition, DDH LLC issued
In December 2021, DDH LLC redeemed the Class A Preferred Units and recognized a loss on the redemption of $
Class B Preferred Units
In connection with the Orange142 acquisition, DDH LLC issued
17
In February 2022, DDH LLC redeemed the Class B Preferred Units and recognized a loss on the redemption of $
Note 7 — Related Party Transactions
Related Party Transactions
Member Payable
As of December 31, 2021, the Company had a net payable to members that totaled $
Board Services and Consulting Agreement
On September 30, 2020, the Company entered into board services and consulting agreements with Walker, Smith and Leah Woolford (“Woolford”). Walker, Smith and Woolford were then all members of the Company. Prior to the Organizational Transactions, Walker served as a Manager on the Board of Managers of DDH LLC, and now serves as Chairman of the Board of Directors and Chief Executive Officer of the Company. Prior to the Organizational Transactions, Smith served as a Manager on the Board of Managers of DDH LLC and now serves as a director on the Board of Directors and President of the Company. Woolford previously served as a Manager on the Board of Managers of DDH LLC and Senior Advisor of DDH LLC. In exchange for these services, the Company paid Walker and Smith annual fees of $
Note 8 — Commitments and Contingencies
Litigation
The Company may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. In management’s opinion, the outcome of any such litigation will not materially affect the Company’s financial condition. Nevertheless, due to uncertainties in the settlement process, it is at least reasonably possible that management’s view of the outcome could change materially in the near term.
Huddled Masses was named as a defendant in a lawsuit on July 10, 2019 related to a delinquent balance to a vendor. The matter is currently underway, and the Company has estimated a potential liability of approximately $
Office Lease
In June 2019, the Company entered into a sublease for its corporate office headquarters at 1233 West Loop South, Ste 1170 in Houston, TX. The lease term expires July 1, 2022, and has a base monthly rent of approximately $
In March 2022, the Company entered into a new lease to move its corporate headquarters to 1177 West Loop South, Ste 1170 in Houston, TX effective July 1, 2022. The lease is for
In March 2021, the Company extended its lease for office space at 716 Congress Ave, Ste 100 in Austin, Texas with an effective date of January 1, 2022. The lease expires December 31, 2023 and has a base rent of approximately $
18
For the three months ended March 31, 2022 and 2021, the Company incurred rent expense of $
Supplemental cash flow information related to the Company’s operating lease is included in the table below for the three months ended March 31, 2022:
| 2022 | ||
Cash paid for amounts included in the measurement of lease liabilities | $ | | |
Supplemental balance sheet information related to operating leases is included in the table below for the year ended March 31, 2022:
| 2022 | ||
Operating lease - right-of-use asset | $ | | |
Operating lease liabilities - current | $ | | |
Operating lease liabilities - long-term |
| | |
Total lease liability | $ | |
The weighted-average remaining lease term for the Company’s operating lease is
Lease liability with enforceable contract terms that have greater than one-year terms are as follows:
2022 |
| $ | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Thereafter |
| | |
Total lease payments |
| | |
Less imputed interest |
| ( | |
Total lease liability | $ | |
Note 9 — Stockholders’ / Members’ Equity (Deficit)
Members’ Equity
Prior to the Organizational Transactions, DDH LLC was authorized to issue common units, Class A Preferred Units and Class B Preferred Units. In connection with the acquisition of Orange142, DDH LLC issued
As of December 31, 2021, the total outstanding common units of DDH LLC was
Stockholders’ Equity – Initial Public Offering
Following the completion of the Organizational Transactions, DDH LLC’s limited liability company agreement was amended and restated to, among other things, appoint the Company as the sole managing member of DDH LLC and effectuate a recapitalization of all outstanding preferred units and common units into (i) economic nonvoting units of DDH LLC held by the Company and, through their indirect ownership of Direct Digital Management, LLC, our Chairman and Chief Executive Officer and our President, and (ii) noneconomic voting units of DDH LLC,
19
The Company is authorized to issue
On February 15, 2022, the Company completed its initial public offering of
The Units were sold at a price of $
The warrants have a fair value of $
The following table summarizes warrant activity during the three months ended March 31, 2022:
Weighted- | Weighted-average | |||||||||
average | Remaining | Aggregate | ||||||||
Exercise | Contractual Term | Intrinsic | ||||||||
| Number of Shares |
| Price |
| (years) |
| Value | |||
Outstanding at January 1, 2022 |
| — | $ | — |
| — | $ | — | ||
Warrants granted |
| | $ | |
|
| — | |||
Warrants exercised |
| — | $ | — |
| — |
| — | ||
Warrants canceled |
| — | $ | — |
| — |
| — | ||
Outstanding at March 31, 2022 |
| | $ | |
| $ | — | |||
Exercisable at March 31, 2022 |
| | $ | |
| $ | — |
20
Note 10 — Loss Per Share / Unit
Basic loss per share / unit is calculated by dividing the net loss for the year by the weighted average number of share / unit outstanding during the period. The Company does not have any dilutive share / unit, and therefore the diluted weighted average number of share / unit outstanding are equal to the basic weighted average number of share / unit.
| For the Three Months Ended | |||||
March 31, | ||||||
| 2022 |
| 2021 | |||
Net income loss per unit attributable to stockholders / members | ( | ( | ||||
Number of units outstanding at the beginning of the period |
| |
| | ||
Weighted average Class A and Class B shares issued during the period |
| |
| — | ||
Weighted average units redeemed during the period |
| ( |
| — | ||
Number of shares / units outstanding at the end of the period, basic and diluted |
| |
| | ||
Net loss per shares / unit, basic and diluted | ( | ( |
Note 11 — Employee Benefit Plans
The Company sponsors a safe harbor, defined contribution 401(k) and profit-sharing plan (the “Plan”) that allows eligible employees to contribute a percentage of their compensation. The Company matches employee contributions up to a maximum of
The Company has an Employee Benefit Plan Trust (the “Trust”) to provide for the payment or reimbursement of all or a portion of covered medical, dental and prescription expenses. The Trust is funded with contributions made by the Company and participating employees at amounts sufficient to keep the Trust on an actuarially sound basis. The self-funded plan has an integrated stop loss insurance policy for the funding of the Trust benefits in excess of the full funding requirements. As of March 31, 2022 and December 31, 2021, the Company analyzed the incurred but not reported claims and records an estimated liability if needed.
Note 12 — Segment Information
Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker is its Chairman and Chief Executive Officer. The Company views its business as
Revenue by business segment is as follows:
| For the Three Months | |||||
Ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
Buy-side advertising |
| $ | | $ | | |
Sell-side advertising |
| |
| | ||
Total revenues | $ | | $ | |
21