Direct Digital Holdings(DRCT) - 2022 Q4 - Annual Report

Part I Business Direct Digital Holdings operates an end-to-end programmatic advertising platform focusing on underserved markets through buy-side and proprietary sell-side segments - The company operates an end-to-end programmatic advertising platform with both buy-side (Huddled Masses, Orange142) and sell-side (Colossus SSP) operations[11] - The buy-side business focuses on providing advertising solutions to approximately 218 small and mid-sized clients, leveraging major Demand Side Platforms (DSPs) to enhance ROI[18] - The proprietary sell-side platform, Colossus SSP, processed over 111 billion average monthly impressions in 2022 and served approximately 114,000 buyers, specializing in connecting advertisers with multicultural audiences[23][24] - The company maintains a high client retention rate of approximately 90% among clients that represent about 80% of its revenues for fiscal years 2022 and 2021[44] Company Overview Direct Digital Holdings provides a full-service programmatic advertising platform, formed through key acquisitions, focusing on data-driven campaign optimization for underserved markets - The company's structure is built upon the 2018 acquisitions of Huddled Masses (buy-side) and Colossus Media (sell-side), and the 2020 acquisition of Orange142 (buy-side)[11] - The buy-side platform, through Huddled Masses and Orange142, serves approximately 218 small and mid-sized clients by leveraging multiple major DSPs like The Trade Desk, Xandr, and Google DV360[18] - The sell-side platform, Colossus SSP™, processed over 111 billion average monthly impressions in 2022 and is integrated with leading DSPs, focusing on both general market and multicultural publishers[23][24] Our Industry and Trends The company is positioned to capitalize on key industry trends including the shift to digital advertising, OTT/CTV growth, and the phasing out of third-party cookies - Key industry shifts include the move to digital advertising, the rise of OTT/CTV over linear broadcast, and increased digital ad adoption by small and mid-sized companies[30][31][32] - There is a significant increase in the multicultural audience, which is projected to be the numerical majority in the U.S. by 2044, creating opportunities for targeted advertising[33] - The phase-out of third-party cookies by 2024 is expected to create opportunities for technology companies that can provide alternative media buying solutions and minimize performance disruption[38] Our Growth Strategy The company's growth strategy focuses on sales expansion, strategic acquisitions, cross-selling, and innovating its data management platform for a post-cookie environment - Expand 'on the ground' buy-side and sell-side sales teams[51] - Pursue acquisitions to enter new verticals and grow market share[51] - Leverage end-to-end offering to win new business and cross-sell[51] - Aggressively grow Colossus SSP inventory, focusing on OTT/CTV and audio[51] - Innovate data management platform and proprietary ID Lake for first-party data collection[51] - Invest in infrastructure and technology to maximize efficiencies[51] Competition The company faces intense competition from large players and fragmented markets on both buy-side and sell-side, differentiating through technology and focus on underserved markets - On the buy-side, the company competes with large entities like Google, Facebook, and Amazon, which have their own inventory, as well as a fragmented market of other service providers[57] - On the sell-side, competition includes approximately 80 SSPs, with notable public competitors being Pubmatic, Magnite, and Acuity Ads[58] - The company differentiates itself through features like inventory quality verification, brand security, and its focus on underserved and multicultural markets[58][59][60] Risk Factors The company faces risks including advertising demand sensitivity, market evolution, operational issues, intense competition, data privacy, and customer concentration - Revenue is highly dependent on overall advertising demand, which can be impacted by economic downturns[66] - The potential restriction or phasing out of third-party cookies and other tracking technologies could diminish the platform's effectiveness and harm the business[66][130] - The company has high customer concentration, with the top two customers accounting for approximately 69% of total revenues in fiscal year 2022[78] - As a holding company, its principal asset is its interest in DDH LLC, and it depends on distributions from DDH LLC to pay taxes and expenses, including payments under the Tax Receivable Agreement[66][171] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[224] Properties The company's headquarters and other offices are in leased facilities, with no owned real property, deemed adequate for current needs - The company's headquarters are in a leased 7,400 sq. ft. facility in Houston, TX, with the lease expiring in February 2030[225] - The company has additional leased offices in Austin, Atlanta, New York, Virginia, and Colorado Springs, and does not own any real property[225] Legal Proceedings The company is not a party to any material legal or administrative proceedings as of the report date - The company is not currently a party to any material legal proceedings[226] Mine Safety Disclosures This item is not applicable to the company - Not applicable[227] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock and warrants trade on Nasdaq, with no cash dividends paid or anticipated, as earnings are retained for business expansion - Class A common stock and warrants are traded on The Nasdaq Capital Market under symbols "DRCT" and "DRCTW"[229] - The company has never declared or paid cash dividends and does not anticipate doing so in the foreseeable future[230] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal year 2022 saw significant revenue growth to $89.4 million, driven by sell-side advertising, with improved net income and Adjusted EBITDA, despite recent credit facility termination Financial Highlights (FY 2022 vs. FY 2021) | Metric | 2022 (USD) | 2021 (USD) | | :--- | :--- | :--- | | Revenue | $89,359,733 | $38,136,862 | | Operating income | $7,978,939 | $4,384,600 | | Net income (loss) | $4,166,603 | $(1,507,097) | | Adjusted EBITDA | $10,169,173 | $6,357,603 | - Total revenue increased by 134% year-over-year, primarily driven by a 400% increase in sell-side advertising revenue, while buy-side revenue grew by 12%[285][286] - The company terminated its $5 million revolving credit facility with Silicon Valley Bank on March 13, 2023, following SVB's closure. The company had not drawn any funds and does not expect an adverse impact on its liquidity[250][301] Results of Operations Total revenues increased 134% to $89.4 million in 2022, driven by sell-side advertising, leading to higher operating income despite a decreased gross margin Consolidated Results of Operations (FY 2022 vs. FY 2021) | Metric | 2022 (USD) | 2021 (USD) | | :--- | :--- | :--- | | Total Revenues | $89,359,733 | $38,136,862 | | Buy-side advertising | $29,348,775 | $26,127,787 | | Sell-side advertising | $60,010,958 | $12,009,075 | | Gross Profit | $29,322,076 | $18,429,125 | | Income from operations | $7,978,939 | $4,384,600 | | Net income (loss) | $4,166,603 | $(1,507,097) | - Gross margin decreased from 48% in 2021 to 33% in 2022, primarily due to the higher concentration of revenues from the sell-side advertising segment, which carries a lower margin[290] - Compensation, taxes, and benefits increased by 66% to $14.1 million due to a one-time severance charge, headcount additions, and higher commission and bonus expenses[293] Liquidity and Capital Resources As of December 31, 2022, the company maintained $4.0 million in cash and $5.7 million in working capital, with primary debt from Lafayette Square, and believes current liquidity is sufficient despite recent credit facility terminations Liquidity Summary | Metric | Dec 31, 2022 (USD) | Dec 31, 2021 (USD) | | :--- | :--- | :--- | | Cash and cash equivalents | $4,047,453 | $4,684,431 | | Working capital | $5,712,680 | $4,057,243 | - The company's main debt obligation is the 2021 Credit Facility with Lafayette Square, which matures on December 3, 2026. In July 2022, the company borrowed an additional $4.26 million under the facility's Delayed Draw Loan[306][310] - Net cash provided by operating activities decreased to $2.1 million in 2022 from $3.8 million in 2021, primarily due to a significant increase in accounts receivable related to revenue growth[321][324] Non-GAAP Financial Measures The company uses Adjusted EBITDA, a non-GAAP measure, to evaluate operating performance, which increased to $10.2 million in 2022 from $6.4 million in 2021 Reconciliation of Net Income (Loss) to Adjusted EBITDA | Metric | 2022 (USD) | 2021 (USD) | | :--- | :--- | :--- | | Net Income (Loss) | $4,166,603 | $(1,507,097) | | Amortization of intangible assets | 1,953,819 | 1,953,818 | | Depreciation and amortization | 34,218 | — | | Interest expense | 3,230,612 | 3,184,029 | | Loss on early extinguishment of debt | — | 2,663,148 | | Tax expense | 326,597 | 63,526 | | Stock-based compensation | 153,778 | — | | Forgiveness of PPP loan | (287,143) | (10,000) | | Other adjustments | 590,689 | 10,179 | | Adjusted EBITDA | $10,169,173 | $6,357,603 | Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Direct Digital Holdings, Inc. is not required to provide information for this item - The company is not required to provide this information as it qualifies as a "smaller reporting company"[350] Consolidated Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2022 and 2021, including a revision of Q3 2022 unaudited information due to unbilled sell-side transactions Consolidated Balance Sheet Highlights (As of Dec 31) | Metric | 2022 (USD) | 2021 (USD) | | :--- | :--- | :--- | | Total Assets | $58,126,039 | $35,999,933 | | Total Current Assets | $31,284,889 | $13,781,059 | | Total Liabilities | $53,530,757 | $36,374,789 | | Total Current Liabilities | $25,572,209 | $9,723,816 | | Total Stockholders' Equity (Deficit) | $4,595,282 | $(374,856) | - The company adopted an "Up-C" corporate structure following its IPO in February 2022, which involves a Tax Receivable Agreement (TRA) with the original LLC owners. As of December 31, 2022, the company recognized a total TRA liability of $4.3 million[366][488] - The company identified unbilled sell-side advertising transactions from August 1 to December 31, 2022, leading to a revision of its previously issued Q3 2022 financial information. This revision increased Q3 2022 revenue by $394,359 but was not deemed material enough to require a restatement[507][508] Changes in and Disagreement with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None reported[516] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2022, due to a material weakness in revenue completeness controls, with remediation efforts underway - A material weakness was identified in controls over the completeness of revenue as of December 31, 2022[521] - The weakness resulted from a failure to capture and invoice certain sell-side digital advertising transactions for a specific customer after billing procedures were modified on August 1, 2022[522] - Management has implemented remediation plans, including enhanced review and reconciliation processes, but the material weakness is not yet considered fully remediated[524][525] Other Information The company reports no other information for this item - None[526] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[527] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference from the 2023 proxy statement[531] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference from the 2023 proxy statement[532] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning security ownership is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference from the 2023 proxy statement[533] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference from the 2023 proxy statement[534] Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference from the 2023 proxy statement[535] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Annual Report on Form 10-K, with schedules omitted as not required or material - This section contains the list of financial statements and exhibits filed with the report[537] Form 10-K Summary This item is not applicable - Not applicable[551]