UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
FOR THE QUARTERLY PERIOD ENDED
OR
TRANSITION REPORT PURSUANT 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 August 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)
| June 30, 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 tax asset, net (Note 12) | | — | ||||
Deferred financing costs, net |
| |
| | ||
Operating lease right-of-use assets |
| |
| — | ||
Other long-term assets |
| |
| | ||
Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDER’ / MEMBERS' EQUITY (DEFICIT) |
|
|
|
| ||
CURRENT LIABILITIES: |
|
|
|
| ||
Accounts payable | $ | | $ | | ||
Accrued liabilities |
| |
| | ||
Current portion of liability related to tax receivable agreement | | — | ||||
Notes payable, current portion |
| |
| | ||
Deferred revenues |
| |
| | ||
Operating lease liabilities, current portion |
| |
| — | ||
Income taxes payable | | — | ||||
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 |
| |
| | ||
Liability related to tax receivable agreement, net of current portion | | — | ||||
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 (deficit) | $ | | $ | |
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 | For the Six Months Ended | ||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 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 from operations |
|
| | | | | ||||||
Other income (expense) |
|
| ||||||||||
Other income |
|
| — | | | | ||||||
Forgiveness of Paycheck Protection Program loan |
| |
| — | | | ||||||
Gain from revaluation and settlement of seller notes and earnout liability | — | | — | | ||||||||
Loss on redemption of non-participating preferred units |
| — |
| — | ( | — | ||||||
Interest expense |
| ( |
| ( | ( | ( | ||||||
Total other expense |
| ( |
| ( | ( | ( | ||||||
Income before taxes | | | | | ||||||||
Tax expense |
| |
| | | | ||||||
Net income | $ | | $ | | $ | | $ | | ||||
Net income per common share / unit: |
|
| ||||||||||
Basic | $ | | $ | | $ | | $ | | ||||
Diluted | $ | | $ | | $ | | $ | | ||||
Weighted-average number of shares of common stock / units outstanding: |
|
| ||||||||||
Basic |
| |
| | | | ||||||
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)
Six Months Ended June 30, 2022
|
|
| Members' / | |||||||||||||||||||||
Common Stock |
|
|
| Accumulated |
| Stockholders’ | ||||||||||||||||||
Common Units | Class A | Class B | equity | equity | ||||||||||||||||||||
| Units |
| Amount |
| Units |
| Amount |
| Units |
| Amount |
| APIC |
| (deficit) |
| (deficit) | |||||||
Balance, December 31, 2021 | | $ | | — | $ | — | — | $ | — | $ | — | $ | ( | $ | ( | |||||||||
Issuance of Class A common stock,net of transaction costs |
| — |
| — |
| |
| |
| — |
| — |
| |
| — |
| | ||||||
Conversion of member units to Class B shares |
| ( |
| ( |
| — |
| — |
| |
| |
| ( |
| — |
| — | ||||||
Redemption of common units |
| ( |
| ( |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||
Stock-based compensation | — | — | — | — | — | — | | — | | |||||||||||||||
Issuance of restricted stock | — | — | | | — | — | ( | — | — | |||||||||||||||
Distributions to members |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Additional paid-in capital related to tax receivable agreement | — | — | — | — | — | — | | — | | |||||||||||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| — | — |
| |
| | |||||||
Balance, June 30, 2022 |
| — | $ | — |
| | $ | |
| | $ | | $ | | $ | ( | $ | |
Three Months Ended June 30, 2022
Common Stock | Members' / | |||||||||||||||||||||||
Accumulated | Stockholders’ | |||||||||||||||||||||||
Common Units | Class A | Class B | equity | equity | ||||||||||||||||||||
| Units |
| Amount |
| Units |
| Amount |
| Units |
| Amount |
| APIC |
| (deficit) | (deficit) | ||||||||
Balance, March 31, 2022 |
| — | $ | — |
| | $ | |
| | $ | | $ | | $ | ( | $ | | ||||||
Transaction costs associated with IPO |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||
Stock-based compensation |
| — |
| — |
| — |
| — |
| — |
| — |
| |
| — |
| | ||||||
Issuance of restricted stock |
| — |
| — |
| |
| |
| — |
| — |
| ( |
| — |
| — | ||||||
Distributions to members |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Additional paid-in capital related to tax receivable agreement |
| — |
| — |
| — |
| — |
| — |
| — |
| |
| — |
| | ||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| |
| | ||||||
Balance, June 30, 2022 |
| — | $ | — |
| | $ | |
| | $ | | $ | | $ | ( | $ | |
See accompanying notes to the unaudited consolidated financial statements.
5
DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ / MEMBERS’ EQUITY (DEFICIT)
(Unaudited)
Six Months Ended June 30, 2021
|
|
|
| Common Stock |
|
|
| Accumulated |
| Members' / | ||||||||||||||
Common Units | Class A | Class B | equity | equity | ||||||||||||||||||||
| Units |
| Amount |
| Units |
| Amount |
| Units |
| Amount |
| APIC |
| (deficit) |
| (deficit) | |||||||
Balance, December 31, 2020 | | $ | | — | $ | — | — | $ | — | $ | — | $ | ( | $ | | |||||||||
Distributions to members |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| |
| | ||||||
Balance, June 30, 2021 |
| | $ | |
| — | $ | — |
| — | $ | — | $ | — | $ | ( | $ | |
Three Months Ended June 30, 2021
Members' / | ||||||||||||||||||||||||
Common Units | Accumulated | Stockholders' | ||||||||||||||||||||||
Common Stock | Class A | Class B | equity | equity | ||||||||||||||||||||
| Units |
| Amount |
| Units |
| Amount |
| Units |
| Amount |
| APIC |
| (deficit) |
| (deficit) | |||||||
Balance, March 31, 2021 |
| |
| $ | |
| — |
| $ | — |
| — |
| $ | — |
| $ | — |
| $ | ( |
| $ | |
Distributions to members | — |
| — | — |
| — | — |
| — |
| — |
| ( |
| ( | |||||||||
Net income | — |
| — | — |
| — | — |
| — |
| — |
| |
| | |||||||||
Balance, June 30, 2021 | | $ | | — | $ | — | — | $ | — | $ | — | $ | ( | $ | |
See accompanying notes to the unaudited consolidated financial statements.
6
DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months Ended June 30, | |||||
| 2022 |
| 2021 | |||
Cash Flows (Used In) Provided By Operating Activities: |
|
| ||||
Net income |
| $ | | $ | ||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
| |||||
Amortization of deferred financing costs |
|
| |
| | |
Amortization of intangible assets |
|
| |
| | |
Amortization of right-of-use assets |
| |
| — | ||
Stock-based compensation |
| |
| — | ||
Forgiveness of Paycheck Protection Program loan |
|
| ( | ( | ||
Paid-in-kind interest | — | | ||||
Deferred income taxes | | — | ||||
Gain from revaluation and settlement of earnout liability |
|
| — | ( | ||
Loss on redemption of non-participating preferred units |
|
| | — | ||
Bad debt expense |
| | ||||
Changes in operating assets and liabilities: | ||||||
Accounts receivable |
|
| ( | ( | ||
Prepaid expenses and other assets |
|
| | ( | ||
Accounts payable |
|
| | | ||
Accrued liabilities |
|
| | | ||
Income taxes payable | | — | ||||
Deferred revenues |
|
| ( | | ||
Operating lease liability | ( | — | ||||
Related party payable |
|
| ( | — | ||
Net cash provided by operating activities |
|
| | | ||
Cash Flows Provided By (Used In) Financing Activities: |
|
| ||||
Payments on term loan |
|
| ( | ( | ||
Payment of deferred financing costs |
|
| ( | — | ||
Proceeds from Paycheck Protection Program loan |
|
| — | | ||
Proceeds from Issuance of Class A common stock, net of transaction costs |
|
| | — | ||
Redemption of common units |
|
| ( | — | ||
Redemption of non-participating preferred units | ( | — | ||||
Payments on seller notes and earnouts payable |
|
| — | ( | ||
Distributions to members |
|
| ( | ( | ||
Net cash provided by (used in) financing activities | ( | |||||
Net 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 | $ | | $ | — | ||
Outside basis difference in partnership | $ | | $ | — | ||
TRA payable to Direct Digital Management, LLC | $ | | $ | — | ||
Tax benefit on TRA | $ | | $ | — |
See accompanying notes to the unaudited consolidated financial statements.
7
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 SSPTM (“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, 2018 | ||
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 accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 29, 2022. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the results for the periods presented.
8
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 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 June 30, 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 establishes an allowance for doubtful accounts as deemed necessary for accounts not covered by this insurance. As of June 30, 2022 and December 31, 2021, the Company’s allowance for doubtful accounts
9
was $
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:
| June 30, |
| December 31, |
| |
| 2022 |
| 2021 |
| |
Customer A |
| | % | | % |
Customer H |
| | % | | % |
Customer B |
| | % | | % |
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 June 30, 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.
10
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 amount of the asset exceeds its estimated fair value and is recognized as a reduction in the carrying amount of the asset. As of June 30, 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.
11
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; |
● | 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
12
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.
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.
| Three Months Ended | Six Months Ended | |||||||
June 30, | June 30, | ||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |
Customer A | | % | | % | | % | | % | |
Customer I |
| | % | | % | | % | | % |
Customer E |
| | % | | % | | % | | % |
Customer F |
| | % | | % | | % | |