DIRECT DIGITAL HOLDINGS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
You should read the following discussion together with our unaudited consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2021. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled "Risk Factors" in our Annual Report on Form 10-K or in other parts of this Quarterly Report on Form 10- Q. See"- Cautionary Note Regarding Forward-Looking Statements" below. Our historical results are not necessarily indicative of the results that may be expected
for any period in the future. 26 Table of Contents
Caution Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws and which are subject to certain risks, trends and uncertainties. We use words such as "could," "would," "may," "might," "will," "expect," "likely," "believe," "continue," "anticipate," "estimate," "intend," "plan," "project" and other similar expressions to identify forward-looking statements, but not all forward-looking statements include these words. All of our forward-looking statements involve estimates and uncertainties that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Accordingly, any such statements are qualified in their entirety by reference to the information described under the caption "Risk Factors" in our Annual Report on Form 10-K and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2021. The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance expressed in or implied by the forward-looking statements. We believe these factors include, but are not limited to, the following:
? our dependence on overall advertising demand, which could be influenced
by economic downturns;
? any unforeseen slowdown or development in the programmatic market
? the effects of health epidemics, such as the current global COVID-19 pandemic;
operational and performance issues with our platform, whether actual or
? perceived, including an inability to respond to changes in technology or
upgrade our technology systems;
any material inadvertent disclosure or breach of confidentiality and/or
? personal information we hold, or the safety of our customer(s),
the IT systems of suppliers or other partners;
? any unavailability or non-performance of non-proprietary technology,
the software, products and services we use;
unfavorable publicity and negative public perception of our industry,
? in particular concerns about the privacy and security of data relating to our
technology and industry practices, and any perceived failure to comply with
laws and industry self-regulation;
? restrictions on the use of third-party “cookies”, mobile device identifiers or other
tracking technologies, which may reduce the effectiveness of our platform;
? any inability to compete in our extremely competitive marketplace;
? any significant fluctuations caused by our high concentration of customers;
? our limited operating history, which could cause our past results not to be
indicative of future operating performance;
? any violation of legal and regulatory requirements or any fault of our
employees, contractors, agents or business partners;
any strain on our resources, diversion of our management’s attention, or impact
? our ability to attract and retain qualified directors through
be a public company;
as a holding company, we depend on the distributions of
? LLC (“
Admissible Agreement) and dividends;
amounts we use to make distributions to our shareholders and pay our expenses
(including our taxes and payments under the Tax Receivables Agreement), which,
? to the extent that they are not distributed as dividends on our Class A common stock,
Chairman of the Board and Chief Executive Officer and President, by virtue of his
ownership of Class A common stock on an exchange or redemption of his LLC
other factors and assumptions discussed under “Risk Factors” and elsewhere in
? this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for
the financial year closed
Should one or more of these risks or uncertainties materialize or should any of these assumptions prove to be incorrect, our actual operating and financial performance may vary in material respects from the performance projected in these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect events or circumstances 27
after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors that could cause our business not to develop as we expect emerge from time to time, and it is not possible for us to predict all of them. Further, we cannot assess the impact of each currently known or new factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Direct Digital Holdings, Inc.and its subsidiaries (collectively the "Company," "DDH," "we," "us" and "our"), headquartered in Houston, Texas, is an end-to-end, full-service programmatic advertising platform primarily focused on providing advertising technology, data-driven campaign optimization and other solutions to underserved and less efficient markets on both the buy- and sell-side of the digital advertising ecosystem. Direct Digital Holdings, Inc.("Holdings") is the holding company that, since the completion of our initial public offering on February 15, 2022, owns certain common units, and serves as the manager, of DDH LLC, which operates the business formed in 2018 through the acquisition of Huddled Masses LLC("Huddled Masses™" or, "Huddled Masses") a buy-side marketing platform, and Colossus Media LLC("Colossus Media") a sell-side marketing platform. On September 30, 2020, DDH LLCacquired Orange142, LLC("Orange142") to further bolster its overall programmatic buy-side advertising platform and enhance its offerings across multiple industry verticals such as travel, healthcare, education, financial services, consumer products and other sectors, with particular emphasis on small- and mid-sized businesses transitioning into digital with growing digital media budgets.
The subsidiaries of
Advertising Solution Date Current % and of Subsidiary Ownership Segment Date of Formation Acquisition Direct Digital Holdings, LLC 100 % N/A June 21, 2018 August 26, 2021 Huddled Masses, LLC 100 % Buy-side November 13, 2012 June 21, 2018 Colossus Media, LLC 100 % Sell-side September 8, 2017 June 21, 2018 Orange142, LLC 100 % Buy-side
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 LGBTQ+ 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.
Key factors affecting our performance
We believe that our growth and financial performance depends on many factors, including those described below.
Buy side advertising business
Acquisition of new customers
On the buy side of our business, our clients are buyers of programmatic ad inventory (ad space) looking to place their ads. We serve the needs of approximately 200 small to medium sized clients per year, made up of buyers of advertising space, including small to medium sized businesses, large advertising companies (which may run multiple agencies),
28 Table of Contents
independent advertising agencies and mid-market advertising services companies. We serve a variety of clients 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 who use our buy-side advertising business for their advertising partner. Our long-term growth and operating results will depend on our ability to attract more customers, including DMOs, in multiple geographies.
Develop sales to existing customers
Our customers understand the independent nature of our platform and our relentless focus on driving results based on return on investment ("ROI"). Our value proposition is complete alignment across our entire digital supply platform beginning with the first dollar in and last dollar out. We are technology, DSP and media agnostic, and we believe our clients trust us to provide the best opportunity for success of their brands and businesses. As a result, our clients have been loyal, with approximately 90% client retention amongst the clients that represent approximately 80% of our revenue on an annual basis during the year ended
December 31, 2021and the nine months ended September 30, 2022. As our clients expand their usage of our technology platform, they often transition to our managed services delivery model, which in turn drives higher profitability for us, as well as increased client loyalty. The managed services delivery model allows us to combine our technology with a highly personalized offering to strategically design and manage advertising campaigns.
Media has become increasingly digital due to three key elements:
? Advances in technology with more sophisticated digital content delivery across
? Changes in consumer behavior, including spending longer portions of the day
use mobile and other devices; and
? Better audience segmentation with more effective and measurable targeting
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 Advertisingby 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. 29 Table of Contents
Sell side advertising business
Increase publisher revenue and buyer ad spend
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 54,000 advertisers per month in the nine months ended
September 30, 2021, which increased to an average of approximately 95,000 advertisers per month in the nine months ended September 30, 2022. As spending on programmatic advertising increasingly becomes a larger share of the overall ad spend, advertisers and agencies are seeking greater control of their digital advertising supply chains. To take advantage of this industry shift, we have entered into Supply Path Optimization agreements directly with buyers. As part of these agreements, we are providing 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.
Monetize ad impressions for publishers and buyers
We focus on monetizing digital impressions by coordinating daily real-time auctions and bids. The publisher makes its ad inventory available on Colossus SSP and invites advertisers to bid based on the user's data received. Each time the publisher's web page loads, an ad request is sent to multiple ad exchanges and, in some cases, to the demand side platform directly from Colossus SSP. In case of real-time bidding (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. We continuously review our available inventory from existing publishers across every format (mobile, desktop, digital video, OTT, CTV, and rich media). The factors we consider when determining which impressions we process include transparency, viewability, and whether or not the impression is human sourced. By consistently applying these criteria, we believe the ad impressions we process will be valuable and marketable to advertisers.
Improved quality of ad inventory
MediaMath'squarterly survey, Colossus Media has consistently ranked in the top 10 among the industry's approximately 80 supply- side companies in terms of key quality measures such as transparency, fraud detection, and accountability. In the advertising industry, inventory quality is assessed in terms of invalid traffic ("IVT") which can be impacted by fraud such as "fake eyeballs" generated by automated technologies set up to artificially inflate impression counts. As a result of our platform design and proactive IVT mitigation efforts, in the nine months ended September 30, 2022, we determined that 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; direct publisher and inventory relationships, for supply path optimization; and ongoing campaign and inventory performance review, to ensure inventory quality and brand protection controls are in place.
Increase access to valuable ad impressions
Our recent growth has been driven by a variety of factors including increased access to mobile web (display and video) and mobile app (display and video) impressions and desktop video impressions. Our performance is affected by our ability to maintain and grow our access to valuable ad impressions from current publishers as well as through new relationships with publishers. For the nine months ended
September 30, 2022, we processed approximately 2.6 trillion bid requests and had connections to approximately 19 DSPs. 30
Investment development and management
Each impression or transaction occurs in a fraction of a second. Given that most transactions take place in an auction/bidding format, we continue to make investments across the platform to further reduce the processing time. In addition to the robust infrastructure supporting our platform, it is also critical that we align with key industry partners in the digital supply chain. The Colossus SSP is agnostic to any specific demand side platform. We automate workflow processes whenever feasible to drive predictable and value-added outcomes for our customers and increase productivity of our organization. In the first quarter of 2023, we 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. Managing industry dynamics
We operate in the rapidly evolving digital advertising industry. Due to the scale and complexity of the digital advertising ecosystem, direct sales via manual, person-to-person processes are insufficient for delivering a real-time, personalized ad experience, creating the need for programmatic advertising. In turn, advances in programmatic technologies have enabled publishers to auction their ad inventory to more buyers, simultaneously, and in real time through a process referred to as header bidding. Header bidding has also provided advertisers with transparent access to ad impressions. As advertisers keep pace with ongoing changes in the way that consumers view and interact with digital media, we anticipate further innovation and expect that header bidding will be extended into new areas such as OTT/CTV. We believe our focus on publishers and buyers has allowed us to understand their needs and our ongoing innovation has enabled us to quickly adapt to changes in the industry, develop new solutions and do so cost effectively. Our performance depends on our ability to keep pace with industry changes such as header bidding and the evolving needs of our publishers and buyers while continuing our cost efficiency.
In general, the advertising industry experiences seasonal trends that affect the vast majority of participants in the digital marketing ecosystem. In our sell-side advertising segment, many advertisers allocate the largest portion of their budgets to the fourth quarter of the calendar year in order to coincide with increased holiday purchasing. As a result, the first quarter tends to reflect lower activity levels and lower revenue. We generally expect these seasonality trends to continue and our ability to effectively manage our resources in anticipation of these trends may affect our operating results.
Components of our operating results
On the buy-side advertising segment, we generate revenue from clients that enter into agreements with us to provide digital marketing and media services to purchase digital advertising space, data, and other add-on features. On the sell-side advertising segment, we generate revenue from publishing clients by selling their advertising inventory to national and local advertisers. We report revenue on a gross basis inclusive of all supplier costs because we bear the full obligation of any costs to provide our services. We pay suppliers for the cost of digital media, advertising inventory, data and any add-on services or features.
Our revenue recognition policies are further described in the “Critical Accounting Policies and Estimates” section.
Cost of revenues for our buy-side advertising segment consists primarily of digital media fees, third-party platform access fees, and other third-party fees associated with providing services to our customers. For the sell-side advertising segment, we pay publishers a fee, which is typically a percentage of the value of the ad impressions monetized through our platform. Cost of revenues consists 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. 31 Table of Contents Operating expenses Operating expenses consist of compensation expenses related to our executive, sales, finance, and administrative personnel (including salaries, commissions, bonuses, stock-based compensation, benefits, and taxes), general and administrative expenses for rent expense, professional fees, independent contractor costs, selling and marketing fees, and administrative and operating system subscription costs, insurance, as well as amortization expense related to our intangible assets. Other income (expense)
Other income. Other revenue includes revenue associated with debt collection and other miscellaneous credit card discounts.
Forgiveness of Paycheck Protection Program Loan. From time to time, we obtain 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. We received the PPP-1 Loan proceeds of $287,100on May 8, 2020. On February 16, 2021, the remaining $10,000balance of the PPP-1 Loan was forgiven. In March 2021, DDH LLCreceived 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 are 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 $590,689in connection with the write-off of the fair value associated with the units. 32 Table of Contents Results of Operations
Comparison of the three and nine month periods ended
The following tables set forth our consolidated results of operations for the periods presented. The period-to-period comparison of results is not necessarily indicative of results for future periods. For the Three Months Ended For the Nine Months Ended September 30, Change September 30, Change 2022 2021 Amount % 2022 2021 Amount % Revenues
710% 36,333,976 5,261,135 31,072 841,591% Total revenue
25,985,375 8,360,745 17,624,630
211% 58,617,020 25,236,370 33,380,650 132%
Cost of revenues Buy-side advertising 2,471,170 2,174,432 296,738
14% 7,694,987 7,480,727 214,260 3% Sell-side advertising 16,053,461 1,951,350 14,102,111
723% 30,344,670 4,348,756 25,995,914 598% Total revenue cost 18,524,631 4,125,782 14,398,849
349% 38,039,657 11,829,483 26,210,174 222%
Gross profit 7,460,744 4,234,963 3,225,781
76% 20,577,363 13,406,887 7,170,476 53%
Operating expenses 5,615,920 3,668,051 1,947,869
53% 15,083,521 10,346,159 4,737,362 46% Operating income 1,844,824 566,912 1,277,912
225% 5,493,842 3,060,728 2,433,114 79% Other expenses
(905,605) (792,400) (113,205)
(14)% (2,525,207) (2,382,149) (143,058) 6% Profit before tax
939,219 (225,488) 1,164,707
517% 2,968,635 678,579 2,290,056 337% Tax expense
128,436 878 127,558 14,528 % 215,112 54,878 160,234 292 %
Net profit (loss)
(1) For a definition of Adjusted EBITDA, an explanation of how our management uses
of this measure, and a reconciliation of Adjusted EBITDA to net income see " - Non-GAAP Financial Measures."
Our revenues increased from
$8.4 millionfor the three months ended September 30, 2021to $26.0 millionfor the three months ended September 30, 2022, an increase of $17.6 millionor 211%. Buy-side advertising revenue increased $1.1 million, or 18%, primarily due to expanded spending from our existing customer base as well as new middle market client spending. Sell-side advertising revenue increased $16.6 million, or 710% over the 2021 three-month results, due to continued revenue growth momentum from enhanced publisher partner engagement and monetization strategies, an increase in impression inventory, as well as the extension of our reach into the underserved and underrepresented publisher communities. For the three months ended September 30, 2022, the Company processed approximately 125 billion average monthly impressions through its sell-side advertising segment, an increase of 248% from the prior year. Our revenues increased from $25.2 millionin for the nine months ended September 30, 2021to $58.6 millionfor the nine months ended September 30, 2022, an increase of $33.4 million, or 132%. Buy-side advertising revenue increased $2.3 million, or 12%, primarily due to expanded spending from our existing customer base as well as new middle market client spending. Sell-side advertising revenue increased $31.1 million, or 591% over the 2021 nine-month results due to continued revenue growth momentum from enhanced publisher partner engagement and monetization strategies, an increase in impression inventory, as well as the extension of our reach into the underserved and underrepresented publisher communities. For the nine months ended September 30, 2022, the Company processed approximately 104 billion average monthly impressions, through its sell-side advertising segment, an increase of 165% from the prior year. 33 Table of Contents Cost of revenues Along with the increase in revenues across both segments, we correspondingly experienced an increase in cost of revenues from $4.1 millionfor the three months ended September 30, 2021to $18.5 millionfor the three months ended September 30, 2022, an increase of $14.4 millionor 349%. Buy-side advertising cost of revenues increased $0.3 millionto $2.5 million, or 35% of revenue, for the three months ended September 30, 2022due to the increase in revenue partially offset by lower media costs, compared to $2.2 millionor 36% of revenue for the three months ended September 30, 2021. Sell-side advertising cost of revenues increased $14.1 million, to $16.0 million, or 85% of revenue for the three months ended September 30, 2022, compared to $2.0 million, or 84% of revenue, for the same period in 2021. Cost of revenues increased from $11.8 millionfor the nine months ended September 30, 2021to $38.0 millionfor the nine months ended September 30, 2022, an increase of $26.2 million, or 222%. Buy-side advertising cost of revenues increased $0.2 millionto $7.7 million, or 35% of revenue for the nine months ended September 30, 2022, compared to $7.5 million, or 37% of revenue for the nine months ended September 30, 2021. The increase in the buy-side of cost of revenues is due to the increase in revenues partially offset by a decrease in the cost of digital media in the nine months ended September 30, 2022. Sell-side advertising cost of revenues increased $26.0 million, to $30.3 million, or 84% of revenue for the nine months ended September 30, 2022, compared to $4.3 million, or 83% of revenue, for the same period in 2021.
Gross profit also increased in the three months ended
September 30, 2022to $7.5 million, or 29% of revenue, compared to $4.2 million, or 49% of revenue, for the three months ended September 30, 2021, an increase of $3.2 millionor 76%. Gross profit also increased in the nine months ended September 30, 2022to $20.6 million, or 35% of revenue, compared to $13.4 million, or 53% of revenue, for the nine months ended September 30, 2021, an increase of $7.2 millionor 53%. The change in margin for the three and nine months ended September 30, 2022is attributable to the mix in revenue between our business segments, as our sell-side segment, whose revenues grew as a percentage of our overall revenue, has a lower gross margin than our buy-side segment. Buy-side advertising gross profit increased $0.8 millionand $2.1 millionfor three and nine months ended September 30, 2022, respectively, as compared to prior the same periods in the prior year. This increase is primarily due to a lower cost of media advertising, as well as higher revenue. Sell-side advertising gross profit increased $2.5 millionand $5.1 millionfor the three and nine months ended September 30, 2022, respectively, as compared to prior year. This increase primarily is a result of the increase in revenue since the gross margins are relatively flat period over period.
The following table shows the components of operating expenses for the periods presented.
For the Three Months Ended For the Nine Months Ended September 30, Change September 30, Change 2022 2021 Amount % 2022 2021 Amount % Compensation, tax and benefits
$ 3,845,918 $ 2,235,066 $ 1,610,85272 % $ 9,895,646 $ 6,131,930 $ 3,763,71661 % General and administrative 1,770,002 1,432,985 337,017 24 % 5,187,875 4,214,229 973,646 23 % Total operating expenses $ 5,615,920 $ 3,668,051 $ 1,947,86953 % $ 15,083,521 $ 10,346,159 $ 4,737,36246 %
Compensation, taxes and benefits
Compensation, taxes and benefits increased from
$2.2 millionfor the three months ended September 30, 2021to $3.8 millionin for the three months ended September 30, 2022, an increase of $1.6 million, or 72%. The increase is due to a one-time severance charge of $0.5 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. Compensation, taxes and benefits increased from $6.1 millionfor the nine months ended September 30, 2021to $9.9 millionin for the nine months ended September 30, 2022, an increase of $3.8 million, or 61%. The increase is due to a one-time severance charge of $0.5 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. 34
We expect to continue to invest in corporate infrastructure and incur additional expenses associated with our transition to and operation as a public company, including increased compensation associated with additional headcount to support our sales initiatives.
General and administrative expenses
General and administrative ("G&A") expenses also increased from
$1.4 millionfor the three months ended September 30, 2021to $1.8 millionfor the three months ended September 30, 2022. G&A expenses as a percentage of revenue was 7% for the three months ended September 30, 2022, compared to 17% for the three months ended September 30, 2021. G&A expenses increased from $4.2 millionfor the nine months ended September 30, 2021to $5.2 millionfor the nine months ended September 30, 2022. G&A expenses as a percentage of revenue was 9% for the nine months ended September 30, 2022, compared to 17% for the nine months ended September 30, 2021. The increase in G&A costs during the three and nine months ended September 30, 2022was primarily due to costs associated with our transition to and operation as a public company. During the three and nine months ended September 30, 2022, we invested in systems, increased insurance, incurred additional software fees, and professional fees. 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 three and nine months ended, September 30, 2022. Other income (expense)
The following table presents the components of other income (expenses) for the periods presented.
For the Three Months Ended For the Nine Months Ended September 30, Change September 30, Change 2022 2021 Amount % 2022 2021 Amount % Forgiveness of Paycheck Protection Program loan $ - $ - $ -
- - - nm 47,982 19,186 28,796 150 % Loss on redemption of non-participating preferred units - - - nm (590,689) - (590,689) nm Gain from revaluation and settlement of seller notes and earnout liability - - - nm - 21,232 (21,232) (100) % Interest expense (905,605) (792,400) (113,205) 14 % (2,269,643) (2,432,567) 162,924 (7) % Total other expense
$ (905,605) $ (792,400) $ (113,205)14 % $ (2,525,207) $ (2,382,149) $ (143,058)6 % nm - not meaningful Other expense for the three months ended September 30, 2022primarily consists of $0.9 millionof interest expense. Other expense for the three months ended September 30, 2021is comprised of approximately $0.8 millionof interest expense. Other expense for the nine months ended September 30, 2022primarily consists of $0.6 millionassociated with the loss on the early redemption of DDH LLC'spreviously outstanding Class B Preferred Units and $2.3 millionof interest expense, partially offset by $0.3forgiveness of the PPP loan and other income. Other expense for the nine months ended September 30, 2021is comprised of approximately $2.4 millionof interest expense partially offset by other income and the forgiveness of the PPP loan.
Interest expense increased for the three months ended
September 30, 2022to $0.9 millioncompared to $0.8 millionfor the three months ended September 30, 2021. The increase in interest expense in the three months period is due to the additional borrowings under 35 Table of Contents the Term Loan Amendment in July 2022. Interest expense decreased for the nine months ended September 30, 2022to $2.3 millioncompared to $2.4 millionfor the nine months ended September 30, 2021. The decrease in year over year interest expense was the result of the refinancing of our debt to a lower interest rate, as well as the redemption of DDH LLC'sClass A Preferred Units in December 2021and DDH LLC'sClass B Preferred Units in February 2022. This was partially offset by higher interest on the additional borrowings on the Term Loan in 2022.
Cash and capital resources
The following table summarizes our cash and cash equivalents, working capital and availability under our Revolving Credit Facility (as defined below) at
September 30, 2022 December 31, 2021 Cash and cash equivalents $ 7,010,796 $ 4,684,431 Working capital $ 6,606,168 $ 4,057,243 Availability under Revolving Credit Facility $
We anticipate funding our operations for the next twelve months using available cash, cash flow generated from operations, and proceeds from our public offering in 2022. As of
September 30, 2022and December 31, 2021, we had cash and cash equivalents of approximately $7.0 millionand $4.7 million, respectively, and as of December 31, 2021we had $1.8 millionavailable under our Revolving Credit Facility. On July 26, 2022we repaid the outstanding balance of $400,000plus accrued interest and terminated the Revolving Credit Facility as of such date. We are working with a lender on a line of credit, and expect to finalize the agreement in the fourth quarter of 2022, but there can be no assurance that we will close on such new facility in a timely basis, or at all. Based on our expectations of continued growth in revenue and cash generated from operations in the coming year and the available cash held by us, we believe that we will have sufficient cash resources to finance our operations and service any maturing debt for at least the next twelve months following the issuance of this Quarterly Report on Form 10-Q. To fund our operations and service our debt thereafter, depending on our growth and results of operations, we may have to raise additional capital through the issuance of additional equity and/or debt, which could have the effect of diluting our stockholders. We are also seeking to secure a new source of revolving indebtedness, but there can be no assurance that we will close on such new facility in a timely basis, or at all. Any equity or debt financings, if available at all, may be on terms which are not favorable to us. As our debt or credit facilities become due, we will need to repay, extend or replace such indebtedness. Our ability to do so will be subject to future economic, financial, business and other factors, many of which are beyond our control. In conjunction with the acquisition of Orange142 on September 30, 2020, DDH LLCand each of its subsidiaries as co-borrowers entered into a loan and security agreement (the "2020 Term Loan Facility") with SilverPeak Credit Partners, LPin the amount of $12.825 million, maturing on September 15, 2023. Interest in year one was 15%, of which 12% was payable 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 the outstanding principal balance on January 15and July 15of 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 LLCand 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 LLCentered 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 LLCand each of its subsidiaries as co-borrowers entered into the Revolving Credit Facility that provides for a revolving credit facility with East West Bankin the amount of $4.5 millionwith an initial availability of $1.0 million. On December 17, 2021, we amended the Revolving Credit Facility, which increased the availability to $5.0 millionwith 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 September 30, 2022and December 31, 2021, the rate was 0.0% and 7.0%, respectively, with a 0.50% unused line fee. The maturity date of the Revolving Credit Facility is September 30, 2022, however, on July 26, 2022, the Company repaid the $400,000that was outstanding pursuant to the Revolving Credit Facility and terminated the Revolving 36
Credit Facility as of such date. The Revolving Credit Facility was secured by the trade accounts receivable of
DDH LLCand guaranteed by Holdings. The Revolving Credit Facility includes financial covenants, including that the Company have (i) a minimum fixed charge coverage ratio of not less than 1.25 to 1.00 as of the end of each fiscal quarter, commencing with the fiscal quarter ending September 30, 2020, (ii) a maximum total net leverage ratio of 2.50 to 1.00 for the fiscal quarters ending December 31, 2021and September 30, 2022, and 2.25 to 1.00 for the fiscal quarters ending thereafter and (iii) a minimum liquidity amount of at least $1.3 millionfor the period of December 31, 2021to June 29, 2022and $1.4 millionthereafter. As of each of September 30, 2022and December 31, 2021, the Revolving Credit Facility had borrowings outstanding in the amount of $0.0 million, and $1.9 millionof unused capacity. 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 LLCwas 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 of September 30, 2022. On December 3, 2021, DDH LLCentered 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 millionclosing date term loan and an up to $10.0 milliondelayed draw term loan. The loans under the 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 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 is greater than 4.00 to 1.00. The applicable impact discount under the 2021 Credit Facility is a discount of 0.05% per annum to the extent that DDH LLCadopts certain services intended to improve overall employee satisfaction and retention plus an additional discount of 0.05% per annum to the extent that DDH LLCmaintains a B Corpcertification by Standards Analysts at the non-profit B Lab(or a successor certification or administrator). We expect that interest rates applicable to the 2021 Credit Facility will be modified upon the implementation of a LIBOR replacement rate that will apply to our current and future borrowings. The maturity date of the 2021 Credit Facility is December 3, 2026. The obligations under the 2021 Credit Facility are secured by senior, first-priority liens on all or substantially all assets of DDH LLCand its subsidiaries and are guaranteed by the subsidiaries of DDH LLCand include a 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. 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 LLCand 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. 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 LLCwill indemnify the Company from and against any claims, losses, expenses and other liabilities incurred by the Company arising from the Company's guarantor obligations under the 2021 Credit Facility and related term loan documents. Additionally, under the Term Loan Amendment, DDH LLCborrowed $4,260,000under 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, 2022through and including the fiscal quarter ending December 31, 2023, $26,250, and (ii) commencing March 31, 2024and continuing on the last day of each fiscal quarter thereafter, $52,500, with a final installment due December 3, 2026in 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 LLCentered into the Redemption Agreement Amendment with USDM Holdings, Inc.that amends the previously disclosed Redemption Agreement by and between DDH LLCand 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 Redemption Agreement Amendment, 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 Amendment to the Repayment Agreement, the proceeds of the Deferred Drawdown Loan were used to repay the outstanding balance and related expenses of the Upfront Repayment Agreement, as well as other transaction costs.
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