Direct Digital Holdings(DRCT) - 2023 Q1 - Quarterly Report

Part I. Financial Information This part presents the company's unaudited financial statements, management's analysis, and disclosures on market risk and internal controls ITEM 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including balance sheets, statements of operations, changes in equity, and cash flows, with detailed notes Consolidated Balance Sheets This section details the company's assets, liabilities, and stockholders' equity at the end of the reporting periods Consolidated Balance Sheet Highlights (USD) | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | 6,718,559 | 4,047,453 | | Accounts receivable, net | 19,050,300 | 26,354,114 | | Total current assets | 26,806,736 | 31,284,889 | | Total assets | 53,184,328 | 58,126,039 | | Total current liabilities | 21,971,010 | 25,572,209 | | Total liabilities | 49,816,342 | 53,530,757 | | Total stockholders' equity | 3,367,986 | 4,595,282 | - Total assets decreased by $4.94 million (8.5%) from December 31, 2022, to March 31, 2023[10] - Total stockholders' equity decreased by $1.23 million (26.7%) from December 31, 2022, to March 31, 2023[10] Consolidated Statements of Operations This section outlines the company's revenues, costs, and resulting profit or loss over the specified periods Consolidated Statements of Operations Highlights (USD) | Metric | Q1 2023 | Q1 2022 | Change (YoY) | | :--- | :--- | :--- | :--- | | Total revenues | 21,222,910 | 11,370,337 | +87% | | Total cost of revenues | 14,789,859 | 6,589,538 | +124% | | Gross profit | 6,433,051 | 4,780,799 | +35% | | Total operating expenses | 6,574,390 | 4,195,928 | +57% | | (Loss) income from operations | (141,339) | 584,871 | -124% | | Net loss | (1,333,934) | (671,623) | +99% | | Net loss per common share (Basic and Diluted) | (0.09) | (0.09) | 0% | - Total revenues increased by $9.85 million (87%) year-over-year, driven by growth in both buy-side and sell-side advertising[13] - Net loss increased by $0.66 million (99%) year-over-year, primarily due to higher operating expenses and other expenses, including a contingent loss on early termination of a line of credit and increased interest expense[13] Consolidated Statements of Changes in Stockholders' Equity (Deficit) This section tracks changes in the company's equity resulting from net loss and stock-based activities Changes in Stockholders' Equity (Deficit) for Q1 2023 (USD) | Item | Amount | | :--- | :--- | | Balance, December 31, 2022 | 4,595,282 | | Stock-based compensation | 94,538 | | Issuance of restricted stock | — | | Warrants exercised | 12,100 | | Net loss | (1,333,934) | | Balance, March 31, 2023 | 3,367,986 | - Total stockholders' equity decreased by $1,227,296 during Q1 2023, primarily due to the net loss incurred[16] Consolidated Statements of Cash Flows This section summarizes cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (USD) | Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | 3,162,969 | (852,317) | | Net cash used in investing activities | (48,212) | — | | Net cash (used in) provided by financing activities | (443,651) | 574,686 | | Net increase (decrease) in cash and cash equivalents | 2,671,106 | (277,631) | | Cash and cash equivalents, end of period | 6,718,559 | 4,406,800 | - Net cash provided by operating activities significantly improved to $3.16 million in Q1 2023 from a net cash outflow of $0.85 million in Q1 2022[21] - Cash and cash equivalents increased by $2.67 million in Q1 2023, ending the period at $6.72 million[21] Notes to Consolidated Financial Statements This section provides detailed disclosures and explanations of the company's accounting policies and financial statement items Note 1 — Organization and Description of Business This note describes the company's corporate structure and its programmatic advertising business segments - Direct Digital Holdings, Inc. operates an end-to-end, full-service programmatic advertising platform focused on underserved markets, utilizing an 'Up-C' structure[24] - The Company's subsidiaries include Huddled Masses and Orange142 (buy-side advertising) and Colossus Media (sell-side advertising, operating Colossus SSP), with Colossus SSP specifically targeting diverse and multicultural audiences[25] Note 2 — Basis of Presentation and Summary of Significant Accounting Policies This note outlines the accounting principles, standards, and policies applied in preparing the financial statements - The Company's financial statements adhere to U.S. GAAP, and as an emerging growth company, it has elected an extended transition period for new accounting standards[27][29] - Revenue is recognized on a gross basis from buy-side and sell-side advertising, with deferred revenue of $949,604 as of March 31, 2023[55][58][59] - The Company adopted the CECL model (ASU 2016-13) on January 1, 2023, with no material impact on its financial statements[77] - As of March 31, 2023, cash and cash equivalents totaled $6,718,559, with management believing sufficient liquidity exists for the next twelve months[78] Note 3 — Property, Equipment and Software, net This note details the cost, accumulated depreciation, and net book value of the company's fixed assets Property, Equipment and Software, Net (USD) | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total property, equipment and software, net | 664,937 | 673,218 | | Depreciation and amortization expense (Q1) | 56,493 | 0 | - The Company acquired the license to its proprietary Colossus SSP platform in November 2022[79] Note 4 — Intangible Assets This note provides information on the company's intangible assets, including their cost, amortization, and net value Intangible Assets, Net (USD) | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Intangible assets, net | 13,149,304 | 13,637,759 | | Amortization expense (Q1) | 488,455 | 488,455 | Future Amortization Expense (USD) | Year | Amount | | :--- | :--- | | 2023 | 1,465,364 | | 2024 | 1,953,818 | | 2025 | 1,878,602 | - Intangible assets primarily consist of customer relationships, trademarks, and non-compete agreements from the Orange142 acquisition[81] Note 5 — Accrued Liabilities This note breaks down the components of liabilities for expenses that have been incurred but not yet paid Accrued Liabilities (USD) | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Accrued compensation and benefits | 3,312,350 | 4,128,505 | | Accrued litigation settlement | 364,596 | 429,096 | | Accrued severance | 271,495 | — | | Total accrued liabilities | 4,673,785 | 4,777,764 | - Accrued severance of $271,495 was recorded as of March 31, 2023[83] - A litigation settlement liability of $364,596 remains as of March 31, 2023, with monthly installment payments ongoing[83] Note 6 — Long-Term Debt This note details the company's long-term borrowing agreements, including terms, balances, and future payment schedules - The Revolving Credit Facility with East West Bank was terminated in July 2022, with no outstanding borrowings[85] - The SVB Loan Agreement for a $5 million revolving credit facility was terminated on March 13, 2023, due to Silicon Valley Bank's closure, resulting in $299,770 of expensed deferred financing costs[88] - The Company has a $32 million Term Loan and Security Agreement with Lafayette Square, with an outstanding balance of $25,520,000 as of March 31, 2023[94] Interest Expense – Lafayette Square (USD) | Period | Amount | | :--- | :--- | | Q1 2023 | 879,362 | | Q1 2022 | 487,500 | | Change (YoY) | +80% | Future Minimum Debt Payments (USD) | Year | Amount | | :--- | :--- | | 2023 | 491,250 | | 2024 | 1,310,000 | | 2025 | 1,310,473 | | 2026 | 22,411,965 | | Total | 25,670,000 | Note 7 — Mandatorily Redeemable Preferred Units This note explains the accounting treatment and redemption of preferred units classified as liabilities - Class B Preferred Units, classified as a liability due to mandatory redemption, were redeemed in February 2022, resulting in a $590,689 loss on redemption[105][106] Note 8 — Related Party Transactions This note discloses transactions and balances between the company and its key management personnel or other related entities - A net payable to members of $1,448,333 was outstanding as of March 31, 2023, and December 31, 2022[107] - The Company operates under an 'Up-C' structure, providing tax benefits and liquidity options to the Continuing LLC Owner[108] - Consulting agreements with key executives were canceled in connection with the IPO, resulting in no fees paid in Q1 2023 compared to $135,000 in Q1 2022[110] Note 9 — Commitments and Contingencies This note describes potential liabilities from legal claims, contractual commitments, and other contingent events - The Company is subject to various legal claims, including a $515,096 litigation settlement liability recorded as of March 31, 2023[112][113] Operating Lease Information (USD) | Metric | March 31, 2023 | | :--- | :--- | | Operating lease - right-of-use asset | 756,654 | | Total lease liability | 813,586 | | Weighted-average remaining lease term | 7 years | | Rent expense (Q1) | 79,761 | | Rent expense (Q1 2022) | 52,288 | Note 10 — Stockholders' Equity (Deficit) and Stock-Based Compensation This note details the components of stockholders' equity and expenses related to employee stock compensation plans - As of March 31, 2023, 11,278,000 shares of Class B common stock were held by DDM[120] Warrant Activity (as of March 31, 2023) | Metric | Amount | | :--- | :--- | | Warrants outstanding | 3,217,800 | | Weighted Average Exercise Price | $5.50 | | Weighted Average Contractual Life | 4.38 years | | Aggregate Intrinsic Value | $0 | - Stock-based compensation expense for Q1 2023 was $94,538[127] - As of March 31, 2023, 388,615 stock options and 589,118 Restricted Stock Units (RSUs) were unvested, with unrecognized compensation expenses of $510,375 and $1,342,261, respectively[128][130] Note 11 — Loss Per Share This note presents the calculation of basic and diluted earnings (loss) per share for the company's common stock Net Loss Per Common Share (USD) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net loss per common share, basic and diluted | (0.09) | (0.09) | | Weighted average common shares outstanding (basic and diluted) | 14,575,845 | 7,106,471 | - Warrants and stock options totaling 3,606,415 were excluded from diluted EPS calculation in Q1 2023 due to their anti-dilutive effect[132] Note 12 — Employee Benefit Plans This note provides information on the company's employee retirement and benefit plans, such as its 401(k) plan - The Company sponsors a 401(k) and profit-sharing plan, with matching contributions of $64,871 in Q1 2023, up from $50,561 in Q1 2022[133] - No profit-sharing contributions were made in Q1 2023 or Q1 2022[133] Note 13 — Tax Receivable Agreement and Income Taxes This note details the Tax Receivable Agreement and the company's income tax provisions, liabilities, and benefits - The Company entered into a Tax Receivable Agreement (TRA) in February 2022, obligating it to pay TRA Holders 85% of net cash tax savings[135] - As of March 31, 2023, the total TRA liability was $4,286,375, with $45,815 paid during Q1 2023[137] - A tax provision benefit of $74,648 was recorded for Q1 2023, compared to $0 in Q1 2022, primarily due to current quarter losses[139][140] Note 14 — Segment Information This note presents financial information for the company's distinct operating segments, buy-side and sell-side advertising - The Company operates in two reportable segments: buy-side advertising (Huddled Masses and Orange142) and sell-side advertising (Colossus Media)[142] Revenue by Business Segment (USD) | Segment | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Buy-side advertising | 7,439,666 | 5,831,041 | | Sell-side advertising | 13,783,244 | 5,539,296 | | Total revenues | 21,222,910 | 11,370,337 | Total Assets by Business Segment (USD) | Segment | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Buy-side advertising | 25,840,255 | 25,685,528 | | Sell-side advertising | 20,140,458 | 25,512,367 | | Corporate office | 7,203,615 | 6,928,144 | | Total assets | 53,184,328 | 58,126,039 | Note 15 — Subsequent Events This note discloses any significant events that occurred after the balance sheet date but before the financial statements were issued - No events or transactions requiring recognition or disclosure occurred subsequent to March 31, 2023, through the report date[144] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, operational results, liquidity, and key performance factors Cautionary Note Regarding Forward-Looking Statements This section warns that the report contains statements about future expectations that are subject to risks and uncertainties - The report contains forward-looking statements subject to various risks and uncertainties that could cause actual results to differ materially[146] - Key risk factors include dependence on advertising demand, operational issues, data privacy concerns, intense competition, and high customer concentration[148] - The Company undertakes no obligation to update any forward-looking statements[151] Overview This section provides a high-level summary of the company's business model, services, and market position - Direct Digital Holdings operates an end-to-end programmatic advertising platform, focusing on underserved markets, through its buy-side (Huddled Masses, Orange142) and sell-side (Colossus Media/Colossus SSP) segments[152][153][154] - Colossus SSP is a proprietary platform delivering targeted advertising to diverse and multicultural audiences[154] Key Factors Affecting Our Performance This section discusses the primary drivers and trends influencing the company's operational and financial results - Buy-side advertising growth is driven by new customer acquisitions (approx. 231 small and mid-sized clients annually) and expanding sales to existing customers, with a 90% client retention rate for top revenue-generating clients[160][161][162] - The Company benefits from the ongoing shift to digital advertising and increased adoption by small- and mid-sized businesses[163][164][167] - Sell-side advertising performance is boosted by increasing revenue from publishers and advertising spend from buyers, reaching approximately 153,000 advertisers per month in Q1 2023 (121% YoY increase)[169] - The Company focuses on monetizing ad impressions through real-time bidding, enhancing ad inventory quality (1% invalid traffic in Q1 2023), and expanding access to valuable impressions[171][172][174] - Both buy-side and sell-side advertising segments experience seasonality, with buy-side revenue higher in Q2/Q3 and sell-side revenue highest in Q4[168][178] Components of Our Results of Operations This section defines and explains the key line items that constitute the company's statements of operations - Revenue is generated from buy-side (digital marketing/media services) and sell-side (selling advertising inventory) segments, reported on a gross basis[179][180] - Cost of revenues primarily includes digital media fees and third-party platform access fees for buy-side, and publisher media fees and data center co-location costs for sell-side[181][182] - Operating expenses encompass compensation, taxes, benefits, general and administrative costs (e.g., rent, professional fees, marketing), and amortization of intangible assets[183] - Other income (expense) includes items like recovery of receivables, interest expense, contingent loss on early termination of line of credit, and loss on early redemption of non-participating preferred units[184][185][186][187] Results of Operations This section provides a detailed comparative analysis of the company's financial performance for the current and prior periods Revenue Performance (Q1 2023 vs. Q1 2022) | Segment | Q1 2023 (USD) | Q1 2022 (USD) | Change (USD) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Buy-side advertising | 7,439,666 | 5,831,041 | 1,608,625 | 28% | | Sell-side advertising | 13,783,244 | 5,539,296 | 8,243,948 | 149% | | Total Revenues | 21,222,910 | 11,370,337 | 9,852,573 | 87% | Cost of Revenues Performance (Q1 2023 vs. Q1 2022) | Segment | Q1 2023 (USD) | Q1 2022 (USD) | Change (USD) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Buy-side advertising | 2,949,153 | 2,069,346 | 879,807 | 43% | | Sell-side advertising | 11,840,706 | 4,520,192 | 7,320,514 | 162% | | Total Cost of Revenues | 14,789,859 | 6,589,538 | 8,200,321 | 124% | - Gross profit increased by $1.7 million (35%) YoY, but gross margin decreased from 42% to 30% due to a higher proportion of lower-margin sell-side revenue[195] Operating Expenses (Q1 2023 vs. Q1 2022) | Category | Q1 2023 (USD) | Q1 2022 (USD) | Change (USD) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Compensation, tax and benefits | 3,634,296 | 2,555,036 | 1,079,260 | 42% | | General and administrative | 2,940,094 | 1,640,892 | 1,299,202 | 79% | | Total Operating Expenses | 6,574,390 | 4,195,928 | 2,378,462 | 57% | - Interest expense increased by $0.3 million (43%) YoY due to additional borrowings and higher interest rates[203][204] Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term obligations using its cash and other assets Liquidity Metrics (USD) | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | 6,718,559 | 4,047,453 | | Working capital | 4,835,726 | 5,712,680 | - The Company believes it has sufficient cash resources for the next twelve months, despite the termination of the SVB Revolving Credit Facility in March 2023[206][220] - Net cash provided by operating activities significantly increased to $3.2 million in Q1 2023 from a $0.9 million outflow in Q1 2022, driven by improved accounts receivable and deferred revenue[221][223] - Net cash used in financing activities was $0.44 million in Q1 2023, compared to $0.57 million provided in Q1 2022, due to debt payments and litigation settlements[221][228] - Future minimum debt payments total $25.67 million, with a substantial portion ($22.4 million) due in 2026[230] Non-GAAP Financial Measures This section presents and reconciles financial metrics not calculated in accordance with Generally Accepted Accounting Principles - Adjusted EBITDA is used as a non-GAAP measure to evaluate operating performance, excluding items like depreciation, amortization, interest, taxes, stock-based compensation, and certain one-time items[231] Adjusted EBITDA (USD) | Period | Amount | | :--- | :--- | | Q1 2023 | 547,975 | | Q1 2022 | 1,121,308 | | Change (YoY) | -51% | - Management uses Adjusted EBITDA for planning, budgeting, and assessing business strategies, and for comparability with peer companies[233][234] Critical Accounting Policies and Estimates This section highlights the accounting policies and estimates that are most important to the portrayal of the company's financial condition - No significant changes in critical accounting policies and estimates occurred during the three months ended March 31, 2023[236] Recent Accounting Pronouncements This section discusses the potential impact of recently issued accounting standards on the company's financial statements - Information on recently adopted and issued accounting pronouncements is detailed in Note 2 to the consolidated financial statements[237] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk As a 'smaller reporting company,' the company is not required to provide detailed disclosures about market risk - The Company is exempt from providing detailed market risk disclosures as it qualifies as a 'smaller reporting company'[238] ITEM 4. Controls and Procedures This section addresses the effectiveness of the company's disclosure controls and internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section contains management's assessment of the effectiveness of the company's information disclosure systems - Management concluded that disclosure controls and procedures were not effective as of March 31, 2023, due to an identified material weakness[239] Management's Annual Report on Internal Control Over Financial Reporting This section provides management's report on the state of internal controls for ensuring accurate financial reporting - Management assessed the Company's internal control over financial reporting as not effective as of March 31, 2023[245] - A material weakness was identified in controls over the completeness of revenue, specifically for digital advertising transactions where invoices were not sent to a particular customer due to modified billing procedures[246] - While the material weakness could have resulted in understated revenue, it did not lead to material misstatements in the financial statements presented[247] Management's Plan to Remediate the Material Weakness This section outlines the steps management is taking to address the identified deficiencies in internal controls - Remediation steps include improving review processes, reconciling demand-side platform reports to sell-side platform data, and enhancing contract management and review processes[248] - The Company plans to engage outside consultants to review business process analysis and data flow to the accounting software platform and financial reporting[248] - The material weakness is not yet fully remediated, but management believes the financial statements fairly present the Company's financial condition[249] Part II. Other Information This part covers legal proceedings, risk factors, sales of securities, and other required disclosures ITEM 1. Legal Proceedings This section discloses any material pending legal actions or governmental proceedings involving the company - The Company is not a party to any material legal or administrative proceedings as of the report date[250] - Litigation, regardless of outcome, is likely to result in substantial cost and diversion of management resources[250] ITEM 1A. Risk Factors This section references the comprehensive risk factors detailed in the company's Annual Report on Form 10-K - This item is not applicable for the current quarterly report[251] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on any sales of equity securities not registered with the SEC and the use of IPO proceeds - No unregistered sales of equity securities occurred during the period[252] - No specific use of proceeds to report for the period[253] ITEM 3. Defaults Upon Senior Securities This section discloses any defaults on the company's senior debt or preferred stock obligations - No defaults upon senior securities were reported[255] ITEM 4. Mine Safety Disclosures This item is not applicable as the company is not involved in mining activities - This item is not applicable to the Company[256] ITEM 5. Other Information This section includes any other information not previously reported that is material to investors - No other information is required to be disclosed[257] ITEM 6. Exhibits This section lists all exhibits filed as part of the quarterly report, including agreements and certifications - Exhibits include Amended and Restated Certificate of Incorporation and Bylaws[259] - Loan and Security Agreements with Silicon Valley Bank and Lafayette Square are listed[259] - Certifications from the Chief Executive Officer and Chief Financial Officer (pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350) are included[259][261] - Inline XBRL Instance Document and Taxonomy Extensions are provided[261] Signatures This section contains the formal signatures certifying the report on behalf of the company - The report was signed by Susan Echard, Chief Financial Officer, on May 15, 2023[265]