DIRECT DIGITAL HOLDINGS, INC. You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. 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" or in other parts of this Annual Report on Form 10-K. 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.
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of federal securities laws that 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" and elsewhere in this Annual Report on Form 10-K. The forward-looking statements contained in this Annual Report on Form 10-K 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 Annual Report on Form 10-K, 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 the overall demand for advertising, which could be influenced
by economic downturns;
? any slow-down or unanticipated development in the market for programmatic
advertising campaigns;
? the effects of health epidemics;
operational and performance issues with our platform, whether real or
? perceived, including a failure to respond to technological changes or to
upgrade our technology systems;
any significant inadvertent disclosure or breach of confidential and/or
? personal information we hold, or of the security of our or our customers',
suppliers' or other partners' computer systems;
? any unavailability or non-performance of the non-proprietary technology,
software, products and services that we use;
unfavorable publicity and negative public perception about our industry,
? particularly concerns regarding data privacy and security relating to our
industry's technology and practices, and any perceived failure to comply with
laws and industry self-regulation;
? restrictions on the use of third-party "cookies," mobile device IDs or other
tracking technologies, which could diminish our platform's effectiveness;
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? any inability to compete in our intensely competitive market;
? any significant fluctuations caused by our high customer concentration;
? our limited operating history, which could result in our past results not being
indicative of future operating performance;
? any violation of legal and regulatory requirements or any misconduct by our
employees, subcontractors, agents or business partners;
any strain on our resources, diversion of our management's attention or impact
? on our ability to attract and retain qualified board members as a result of
being a public company;
? as a holding company, we depend on distributions from
expenses (including payments under the Tax Receivable Agreement) and dividends;
amounts we use to make distributions to our stockholders and pay our expenses
? (including our taxes and payments under the Tax Receivable Agreement), which,
to the extent not distributed as dividends on our Class A common stock, would
benefit DDM as a result of its ownership of Class A common stock upon an
exchange or redemption of its LLC Units; and
? other factors and assumptions discussed in this Annual Report on Form 10-K
under "Risk Factors," and elsewhere in this Annual Report on Form 10-K.
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 Annual Report on Form 10-K to reflect events or circumstances 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.
Overview
Direct Digital Holdings, Inc. and its subsidiaries (collectively the "Company," "DDH," "we," "us" and "our"), headquartered inHouston, 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 onFebruary 15, 2022 , owns certain common units, and serves as the manager, ofDirect Digital Holdings, LLC ("DDH LLC "), which operates the business formed in 2018 through the acquisition ofHuddled Masses LLC ("Huddled Masses™" or "Huddled Masses"), a buy-side marketing platform, andColossus Media LLC ("Colossus Media"), a sell-side marketing platform. OnSeptember 30, 2020 ,DDH LLC acquiredOrange142, 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 and consumer products with particular emphasis on small- and mid-sized businesses transitioning into digital with growing digital media budgets. 46 Table of Contents
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 March
6, 2013
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 LGBTQIA+ 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.
Recent Developments
Silicon Valley Bank Financing
OnJanuary 9, 2023 , we entered into a Loan and Security Agreement (the "SVB Loan Agreement"), by and amongSilicon Valley Bank , as lender, andDDH LLC , the Company, Huddled Masses, Colossus Media and Orange142, as borrowers. The SVB Loan Agreement provides for a revolving credit facility (the "SVB Revolving Credit Facility") in the original principal amount of$5 million , subject to a borrowing base determined based on eligible accounts, and up to an additional$2.5 million incremental revolving facility subject to the lender's consent, which may increase the aggregate principal amount of the Credit Facility to$7.5 million . Loans under the Credit Facility mature onSeptember 30, 2024 unless the Credit Facility is otherwise terminated pursuant to the terms of the Loan Agreement.
On
As the Company had not yet drawn any amounts under the SVB Revolving Credit Facility, onMarch 13,2023 , the Company issued a notice of termination of the SVB Loan Agreement and is in the process of terminating the SVB Revolving Credit Facility. Prior to issuing the notice of termination, the Company received consent to terminate the SVB Revolving Credit Facility and a waiver of the terms relating to the SVB Revolving Credit Facility under its Term Loan and Security Agreement, dated as ofDecember 3, 2021 , withLafayette Square Loan Servicing, LLC . The Company did not hold material cash deposits or securities atSilicon Valley Bank and as of the date of this report, has not experienced any adverse impact to its liquidity or to its current and projected business operations, financial condition or results of operations. Additionally, based on the Company's expectations of its cash flow from operations and the available cash held by the Company, the Company believes that it will have sufficient cash resources to finance its operations and service any debt obligations for at least the next twelve months following the issuance of this Annual Report on Form 10-K. However, uncertainty remains over liquidity concerns in the financial services industry, and our business, our business partners, or industry as a whole may be adversely impacted in ways that we cannot predict at this time. 47 Table of Contents
The table below summarizes the financial highlights of our business:
Year Ended December 31,
2022 2021
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 (1) $ 10,169,173 $ 6,357,603
Net cash provided by operating activities
(1) For a definition of Adjusted EBITDA, an explanation of our management's use
of this measure, and a reconciliation of Adjusted EBITDA to net loss, please
see "- Non-GAAP Financial Measures."
Key Factors Affecting Our Performance
We believe our growth and financial performance are dependent on many factors, including those described below.
Buy-side advertising business
New Customer Acquisitions
On the buy-side of our business, our customers consist of purchasers of programmatic advertising inventory (ad space) looking to place their advertisements. We served the needs of approximately 218 small and mid-sized clients during the fiscal year endedDecember 31, 2022 , consisting of advertising space buyers, including small and mid-sized companies, large advertising holding companies (which may manage several agencies), independent advertising agencies and mid-market advertising service organizations. We serve a variety of customers 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 that use our buy-side advertising businesses for their advertising partner. Our long-term growth and results of operations will depend on our ability to attract more customers, including DMOs, across multiple geographies.
Expand Sales to Existing Customers
Our customers understand the independent nature of our platform and 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 during the fiscal year ended
December 31, 2022 . In addition, we cultivate client relationships through our
pipeline of managed and moderate/self-serve clients that conduct campaigns
through our platform. The managed services delivery model allows us to combine
our technology with a highly personalized offering to strategically design and
manage advertising campaigns. .
Shift to
Media has increasingly become more digital as a result of three key ongoing developments:
? Advances in technology with more sophisticated digital content delivery across
multiple platforms;
? Changes in consumer behavior, including spending longer portions of the day
using mobile and other devices; and
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? Better audience segmentation with more efficient targeting and measurable
results.
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 ofDigital Advertising by 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.
Seasonality
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.
Sell-side advertising business
Increasing revenue from publishers and advertising spend from buyers
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 80,000 advertisers per month in 2021, which increased to approximately 114,000 inDecember 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 provide 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 inSeptember 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.
Monetizing 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
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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.
Enhancing ad inventory quality
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 fiscal
2022, 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.
Growing 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 year endedDecember 31, 2022 , we processed approximately 3.4 trillion bid requests.
Expanding and managing investments
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 half 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.
Seasonality
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
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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 Results of Operations
Revenue
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 discussed in more detail under "Critical Accounting Policies and Estimates."
Cost of revenues
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.
Operating expenses
Operating expenses consist of compensation expenses related to our executive, sales, finance, and administrative personnel (including salaries, commissions, stock-based compensation, bonuses, 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. In fiscal 2020, we acquired Orange142, and incurred transaction costs primarily consisting of legal fees.
Other (Expense) Income
Other income. Other income includes income associated with recovery of receivables and other miscellaneous credit card rebates.
Forgiveness of Paycheck Protection Program Loan. During the fiscal years endedDecember 31, 2021 and 2020, we obtained loans pursuant to the Paycheck Protection Program ("PPP"), administered by theU.S. Small Business Administration ("SBA"). Forgiveness of PPP loans is recognized as a gain in the period it is granted. OnFebruary 16, 2021 , the remaining$10,000 balance of the PPP-1 Loan granted in 2020 was forgiven. InMarch 2021 ,DDH LLC received the PPP-2 Loan proceeds of$287,143 . OnApril 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 is classified as a liability, and the corresponding distributions are recognized as interest expense. Loss on early redemption of non-participating preferred units. InFebruary 2022 , we redeemed the non-participating Class B Preferred Units and recognized a loss on the redemption of$590,689 in connection with the write-off of the fair
value
associated with the units.
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Loss on early extinguishment of debt. In December 2021 , we refinanced the 2020
Term Loan Facility (as defined below) and incurred a loss on early
extinguishment of debt associated with prepayment penalties, exit fee, and the
write-off of the unamortized deferred financing costs.
Results of Operations
Comparison of the Fiscal Years 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.
Year Ended December 31, Change
2022 2021 Amount Pcnt
Revenues
Buy-side advertising $ 29,348,775 $ 26,127,787 $ 3,220,988 12 %
Sell-side advertising 60,010,958 12,009,075 48,001,883 400 %
Total Revenues 89,359,733 38,136,862 51,222,871 134 %
Cost of revenues
Buy-side advertising 10,438,547 9,927,295 511,252 5 %
Sell-side advertising 49,599,110 9,780,442 39,818,668 407 %
Total cost of revenues 60,037,657 19,707,737 40,329,920 205 %
Gross profit 29,322,076 18,429,125 10,892,951 59 %
Operating expenses 21,343,137 14,044,525 7,298,612 52 %
Income from operations 7,978,939 4,384,600 3,594,339 82 %
Other expense (3,485,739) (5,828,171) 2,342,432 40 %
Income (loss) before taxes 4,493,200 (1,443,571) 5,936,771 411 %
Tax expense 326,597 63,526 263,071 414 %
Net income (loss) $ 4,166,603 $ (1,507,097) $ 5,673,700 376 %
Adjusted EBITDA (1) $ 10,169,173 $ 6,357,603 $ 3,811,570 60 %
For a definition of Adjusted EBITDA, an explanation of our management's use (1) of this measure, and a reconciliation of Adjusted EBITDA to net loss see " -
Non-GAAP Financial Measures."
Revenues
Our revenues increased from$38.1 million in 2021 to$89.4 million in 2022, an increase of$51.2 million or 134%. Buy-side advertising revenue increased$3.2 million or 12%, while sell-side advertising revenue increased$46.7 million , or 389% over fiscal year 2021. The increase in our buy-side advertising revenue was due to both expanded spending from our existing customer base as well as new middle market client spending. The increase in our sell-side advertising revenue was primarily due to a continued increase in impression inventory, as well as increased publisher engagement across general market and underrepresented publisher communities. For the year endedDecember 31, 2022 , the Company processed approximately 111 billion average monthly impressions through its sell-side advertising segment, an increase of 57% from the prior year. We expect continued organic growth in both our buy-side and sell-side advertising segments over the next twelve months, with our sell-side advertising segment expected to report a higher percentage of our consolidated revenue.
Cost of Revenues
Along with the increase in gross sales across both platforms, we correspondingly experienced an increase in cost of revenues from$19.7 million in 2021 to$60.0 million in 2022, an increase of$40.3 million or 205%. Buy- side advertising 52 Table of Contents cost of revenues increased$0.5 million , to$10.4 million , or 36% of revenue for the year endedDecember 31, 2022 , compared to$9.9 million , or 38% of revenue, for the same period in 2021. The increase in costs were primarily due to the related increase in revenue, while the 2% decrease as a percentage of revenue was due to lower cost of media and related fees. Sell-side advertising cost of revenues increased$39.8 million , to$49.6 million , or 85% of revenue for the year endedDecember 31, 2022 , compared to$9.8 million , or 81% of revenue, for the same period in 2021. The increase in costs was primarily due to the related increase in revenue, while the 3% increase as a percentage of revenue was due to the mix and concentration of publishers and the related costs. We expect these higher costs to continue in future fiscal periods.
Gross Profit
Gross profit also increased in the year endedDecember 31, 2022 to$29.3 million , or 33% of revenue, compared to$18.4 million , or 48% of revenue, for the year endedDecember 31, 2021 , an increase of$10.9 million or 59%. As a percent of revenue, the gross margin decreased 16% due to the higher concentration of revenues from the sell-side advertising segment which carries a lower margin. Buy-side advertising gross profit increased$2.7 million , primarily due to lower media costs and related fees as well as increased revenue. Sell-side advertising gross profit increased$8.1 million over 2021, primarily due to the increase in revenue over the prior year.
Operating Expenses
The following table sets forth the components of operating expenses for the
periods presented.
Year Ended December 31, Change
2022 2021 Amount Pcnt
Compensation, tax and benefits
66 %
General and administrative 7,218,871 5,525,107 1,693,764 31 %
Total operating expenses $ 21,343,137 $ 14,044,525 $ 7,298,612 52 %
Compensation, taxes and benefits
Compensation, taxes and benefits increased from$8.5 million in 2021 to$14.1 million in 2022, an increase of$5.6 million , or 66%. The increase is due to a one-time severance charge of$0.6 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. General and administrative ("G&A") expenses increased from$5.5 million in 2021 to$7.2 million in 2022. G&A expenses as a percentage of revenue was 8% for 2022, compared to 14% for 2021. The increase in G&A costs during 2022 was primarily due to costs associated with our transition to and operation as a public company. During the year endedDecember 31, 2022 , we invested in systems, increased insurance, incurred additional software fees, and professional fees. We expect to continue to invest in and incur additional expenses associated with our transition to operating as a public company, including increased professional fees, investment in automation, and compliance costs associated with developing the requisite infrastructure required for internal controls. In connection with our IPO, the Company adopted the 2022 Omnibus Incentive Plan ("2022 Omnibus Plan") to facilitate the grant of equity awards to our employees, consultants and non-employee directors. OnJune 10, 2022 , our board of directors granted stock options and restricted stock units ("RSUs") to our employees and non-employee directors. The stock options and RSUs granted did not have a material impact to G&A expense for the year endedDecember 31, 2022 . 53 Table of Contents Other expense The following table sets forth the components of other income (expense) for the periods presented. Year Ended December 31, Change 2022 2021 Amount Pcnt Forgiveness of Paycheck Protection Program loan$ 287,143 $ 10,000 $ 277,143 2,771 % Other income 48,419 19,185 29,234 152 % Loss on redemption of non-participating preferred units (590,689) (41,622) (549,067) 1,319 % Gain from revaluation and settlement of seller notes and earnout liability - 31,443 (31,443) nm Loss on early extinguishment of debt - (2,663,148) 2,663,148 nm Interest expense (3,230,612) (3,184,029) (46,583) 1 % Total other expense$ (3,485,739) $ (5,828,171) $ 2,342,432 40 % nm - not meaningful Other expense in 2022 primarily consists of$0.6 million associated with the loss on the early redemption ofDDH LLC's previously outstanding Class B Preferred Units and$3.2 million of interest expense, partially offset by$0.3 forgiveness of the PPP loan and other income. Other expense for 2021 is comprised of approximately$3.1 million of interest expense and$2.7 million associated with the loss on early extinguishment of the SilverPeak Term Loan Facility, partially offset by other income and the forgiveness of the PPP loan.
Interest Expense
Interest expense remained flat in 2022 at$3.2 million compared to 2021. The higher debt balance and deferred financing fees in 2022 drove higher interest expense, which was offset by the lower dividend interest expense on the preferred units redeemed during the IPO.
Liquidity and Capital Resources
The following table summarizes our cash and cash equivalents, working capital, and availability under our Revolving Credit Facility (as defined below) onDecember 31, 2022 and 2021: 2022 2021 Cash and cash equivalents$ 4,047,453 $ 4,684,431 Working capital$ 5,712,680 $ 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 availability under the revolving credit facility. OnJanuary 9, 2023 the Company entered into a$5.0 million revolving credit facility agreement withSilicon Valley Bank , and onMarch 13, 2023 , followingSilicon Valley Bank's closure and entry into receivership, the Company issued a notice of termination of the credit facility. (See Note 15 - Subsequent Events in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K). As ofDecember 31, 2022 and 2021, we had cash and cash equivalents of approximately$4.0 million and$4.7 million , respectively, and as ofDecember 31, 2022 and 2021 we had$0 and$1.8 million , respectively, available under our Revolving Credit Facility withEast West Bank (the "Revolving Credit Facility"). OnJuly 26, 2022 we repaid the outstanding balance of$400,000 plus accrued interest and terminated the Revolving Credit Facility as of such date. 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 Annual Report on Form 10-K. To fund our operations and service our debt thereafter, depending on our growth and results of operations, we may have
to
raise
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additional capital through the issuance of additional equity and/or debt, which
could have the effect of diluting our stockholders. In addition to any of these
options, or in lieu thereof, we may also choose to secure a new revolving credit
facility once the termination of the SVB Loan Agreement with Silicon Valley Bank
is finalized. 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 LLC
and each of its subsidiaries as co-borrowers entered into a loan and security
agreement (the "2020 Term Loan Facility") with SilverPeak Credit Partners, LP in
the amount of $12.8 million . Interest in year one of the facility was 15%, of
which 12% was payable in cash 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 a portion of the outstanding principal balance on January 15 and July 15
of 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 LLC
and its subsidiaries. The 2020 Term Loan Facility contained a number of
financial covenants and customary affirmative covenants. In addition, the 2020
Term Loan Facility included a number of negative covenants, including (subject
to certain exceptions) limitations on (among other things): indebtedness, liens,
investments, acquisitions, dispositions, and restricted payments. Each of Mark
Walker , our Chairman of the Board and Chief Executive Officer, and Keith Smith ,
our President, provided limited guarantees of the obligations under the 2020
Term Loan Facility. The maturity date of the 2020 Term Loan Facility was
September 15, 2023 ; however, on December 3, 2021 , DDH LLC entered into the Term
Loan and Security Agreement (the "2021 Credit Facility") with Lafayette Square
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 LLC and each of its subsidiaries as co-borrowers entered into the Revolving
Credit Facility with East West Bank that provided for a revolving credit
facility with East West Bank in the amount of up to $4.5 million with an initial
availability of $1.0 million . On December 17, 2021 , we amended the Revolving
Credit Facility to increase the availability to $5.0 million with 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 December 31, 2021 , the
rate was 7.0% with a 0.50% unused line fee. The maturity date of the Revolving
Credit Facility was September 30, 2022 , however, on July 26, 2022 , the Company
repaid the $400,000 that was outstanding pursuant to the Revolving Credit
Facility and terminated the Revolving Credit Facility as of such date. The
Revolving Credit Facility was secured by the trade accounts receivable of DDH
LLC and guaranteed by the Company. 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 LLC was 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 December 31, 2022 .
On December 3, 2021 , DDH LLC entered into the 2021 Credit Facility with
Lafayette Square, as administrative agent, and the various lenders thereto. The
term loan under the 2021 Credit Facility provides for a term loan in the
principal amount of up to $32.0 million , consisting of a $22.0 million closing
date term loan and an up to $10.0 million delayed draw term loan (the "Delayed
Draw Loan"). The loans under the 2021 Credit Facility bear interest per annum
equal to LIBOR plus the applicable margin minus any applicable impact discount.
The applicable margin under the 2021 Credit Facility as amended by the Term Loan
Amendment (as defined below) is determined based on the consolidated total net
leverage ratio of the Company and its consolidated subsidiaries, at a rate of
7.00% per annum if the consolidated total net leverage ratio is less than 1.00
to 1.00 and up to 10.00% per annum if the consolidated total net leverage ratio
is greater than 3.50 to 1.00. The applicable impact discount under the 2021
Credit Facility is a discount of 0.05% per annum based upon DDH LLC's
participation in each of certain services intended to improve overall employee
satisfaction and retention plus an additional discount of 0.05% per annum to the
extent that DDH LLC maintains a B Corp certification 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 .
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The obligations under the 2021 Credit Facility are secured by senior,
first-priority liens on all or substantially all assets and property of DDH LLC
and its subsidiaries and are guaranteed by the subsidiaries of DDH LLC and
include a secured 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. 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 LLC will indemnify the Company from and
against any claims, losses, costs, charges 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 LLC borrowed $4,260,000 under 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, 2022 through and including the fiscal quarter ending
December 31, 2023 , $26,250 , and (ii) commencing March 31, 2024 and continuing on
the last day of each fiscal quarter thereafter, $52,500 , with a final
installment due December 3, 2026 in 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 LLC entered into the Second Amendment to Redemption
Agreement with USDM Holdings, Inc. that amends the previously disclosed
Redemption Agreement by and between DDH LLC and 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 Second
Amendment to Redemption Agreement, 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 Term Loan Amendment, proceeds of the Delayed Draw
Loan were used to repay in full the outstanding balance and related expenses of
the Original Redemption Agreement, as well as other transaction costs.
Since the conclusion of the fiscal year ended December 31, 2022 , we entered into
the SVB Loan Agreement on January 9, 2023 with Silicon Valley Bank . The SVB Loan
Agreement provides for the SVB Revolving Credit Facility in the original
principal amount of $5 million , subject to a borrowing base determined based on
eligible accounts, and up to an additional $2.5 million incremental revolving
facility subject to the lender's consent, which may increase the aggregate
principal amount of the SVB Revolving Credit Facility to $7.5 million . Loans
under the SVB Revolving Credit Facility mature on September 30, 2024 , unless the
SVB Revolving Credit Facility is otherwise terminated pursuant to the terms of
the SVB Loan Agreement.
Borrowings under the SVB Revolving Credit Facility bear interest at a floating
rate per annum equal to the greater of (i) 6.25% and (ii) the prime rate plus
the prime rate margin; provided, that during the periods when the borrowers have
maintained liquidity (as described below) of at least $7,500,000 during the
immediately preceding three-month period of time (the "Streamline Period"), the
outstanding principal amounts of any advances will accrue interest at a floating
rate per annum equal to the greater of (a) 5.75% and (b) the prime rate plus the
prime rate margin. For purposes of the Loan Agreement, the prime rate is
determined by reference to the "prime rate" as published in The Wall Street
Journal or any successor publication thereto, and the prime rate margin will be
1.50%; provided, that during a Streamline Period, the prime rate margin will be
1.00%.
At our option, the Company may at any time prepay the outstanding principal
balance of the SVB Revolving Credit Facility in whole or in part, without
penalty or premium. Interest on the principal amount of borrowings under the SVB
Revolving Credit Facility is payable in arrears on a monthly basis on the last
calendar day of each month, on the date of any prepayment of the SVB Revolving
Credit Facility and on the maturity date.
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The Company is required to maintain compliance at all times with a liquidity covenant requiring us to maintain liquidity of not less than$5 million , where liquidity is defined as the sum of the borrowers' unrestricted cash and cash equivalents held atSilicon Valley Bank plus availability under the SVB Revolving Credit Facility. The SVB Revolving Credit Facility is secured by all or substantially all of the borrowers' personal property and assets (subject to the limitations expressly set forth in the SVB Loan Agreement). The SVB Loan Agreement contains customary representations and warranties and includes affirmative and negative covenants applicable to the borrowers thereto and their respective subsidiaries. The affirmative covenants include, among others, covenants requiring the Company to maintain its legal existence and governmental compliance, deliver certain financial reports and maintain insurance coverage. The negative covenants include, among others, restrictions on indebtedness, liens, investments, mergers, dispositions, pledges of the Company's assets to other parties, prepayment of other indebtedness and dividends and other distributions. The SVB Loan Agreement also includes customary events of default, including, among other things, non-payment defaults, covenant defaults, material inaccuracy of representations and warranties, cross-default to other material indebtedness, certain bankruptcy and insolvency events, certain undischarged judgments, material invalidity of guarantees or grant of security interest, material adverse change, and change of control, in certain cases subject to certain thresholds and grace periods. The occurrence of an event of default could result in the acceleration of the obligations under the SVB Loan Agreement. OnMarch 10, 2023 , theCalifornia Department of Financial Protection and Innovation closed SVB and appointed theFederal Deposit Insurance Corporation as receiver. As the Company had not yet drawn any amounts under the SVB Revolving Credit Facility, onMarch 13, 2023 the Company issued a notice of termination of the SVB Loan Agreement and is in the process of terminating the SVB Revolving Credit Facility. Prior to issuing the notice of termination, the Company received a consent to terminate the SVB Revolving Credit Facility and a waiver of the terms relating to the SVB Revolving Credit Facility under the 2021 Credit Facility with Lafayette Square. The Company did not hold material cash deposits or securities atSilicon Valley Bank and as of the date of this report, has not experienced any adverse impact to its liquidity or to its current and projected business operations, financial condition or results of operations. Additionally, based on the Company's expectations of its cash flow from operations and the available cash held by the Company, the Company believes that it will have sufficient cash resources to finance its operations and service any debt obligations for at least the next twelve months following the issuance of this Annual Report on Form 10-K. However, uncertainty remains over liquidity concerns in the financial services industry, and our business, our business partners, or industry as a whole may be adversely impacted in ways that we cannot predict at this time.
Consolidated Statement of Cash Flow Data:
For the Year
Ended
2022 2021
Net cash provided by operating activities $ 2,128,666 $ 3,751,151
Net cash used in investing activities (687,957) -
Net cash used in financing activities (2,077,687) (678,718)
Net (decrease) increase in cash and cash equivalents
Cash Flows from Operating Activities
Our cash flows from operating activities are primarily influenced by growth in
our operations, increases or decreases in collections from our customers and
related payments to our buyers and suppliers of advertising media and data. Cash
flows from operating activities have been affected by changes in our working
capital, particularly changes in accounts receivable, accounts payable and
accrued liabilities. The timing of cash receipts from customers and payments to
suppliers can significantly impact our cash flows from operating activities. We
typically pay suppliers in advance of collections from our customers, but our
collection and payment cycles can vary from period to period. In addition, we
expect seasonality to impact cash flows from operating activities on a quarterly
basis.
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For the Years Ended
Cash flows from operating activities decreased from$3.8 million provided by operating activities for the year endedDecember 31, 2021 to$2.1 million provided by operating activities for the year endedDecember 31, 2022 . The period-over-period decrease of$1.7 million was primarily due to a$15.2 million increase related to changes in accounts receivable and$1.8 million decrease in deferred revenues due to the increase in revenue and timing of collection of payments from customers, as well as a$1.3 million increase in prepaids primarily related to costs associated with becoming public company. This is partially offset by$5.7 million of higher net income, a$7.5 million increase in accounts payable and a$3.0 million increase for changes in accrued liabilities related to the increase in cost of revenues and timing of payments to vendors.
Cash Flows from Investing Activities
For the Years Ended
During the year ended
Cash Flows Provided by Financing Activities
For the Years Ended
Our financing activities consist primarily of proceeds and payments under our notes payable and line of credit, proceeds from government loans, distributions toDDH LLC members, and during 2022, net proceeds from our IPO as well as the redemption payments forDDH LLC's common units and ClassB Units held byUSDM Holdings, Inc. Net cash provided by financing activities has been and will be used to finance our operations, including our investment in people and infrastructure, to support our growth. During the year endedDecember 31, 2022 , net cash used in financing activities increased by$1.4 million , from$(0.7) million used in financing activities for the year endedDecember 31, 2021 to$(2.1) million used in financing activities for the year endedDecember 31, 2022 . During the year endedDecember 31, 2022 , we received net proceeds of$11.2 million related to our issuance of Class A common units and used a portion of the proceeds to redeem the common units and Preferred B units held byUSDM Holdings, Inc. for approximately$14.2 million . We also borrowed$4.3 million under the Delayed Draw Loan during the year endedDecember 31, 2022 . Also during the year endedDecember 31, 2022 , we paid$0.4 million related to the Revolving Credit Facility, paid our quarterly debt obligation on the 2021 Credit Facility of$0.6 million , paid additional deferred financing costs related to 2021 Credit Facility and the Revolving Credit Facility amended in late 2021 of$0.5 million , and members ofDDH LLC received tax distributions of$1.7 million . During the year endedDecember 31, 2021 , we received$22.0 million under the 2021 Credit Facility with Lafayette Square, incurred$2.2 million of deferred financing fees, paid$15.7 million to extinguish the 2020 Term Loan Facility, and redeemed$3.5 million of non-participating Preferred A Units. We also paid$0.4 million to the Former shareholder for amounts due under their Seller Notes and Seller Earnouts and received proceeds from the government for PP loans of$0.3 million . Members ofDDH LLC received tax distributions of$1.2 million .
Contractual Obligations and Future Cash Requirements
Our principal contractual obligations expected to give rise to material cash requirements consist of non-cancelable leases for our various facilities and the 2021 Credit Facility. We lease furniture and office space inHouston andAustin from an unrelated party under non-cancelable operating leases dating throughFebruary 2030 . These leases will require minimum payments of$154,490 in 2023,$110,215 in 2024,$156,077 in 2025,$159,755 in 2026,$163,474 in 2027 and$398,102 thereafter. We anticipate that the future minimum payments related to our current indebtedness over the next five years will be$655,000 in 2023,$1.3 million in 2024,$1.3 million in 2025,$1.3 million in 2026,$1.3 million in 2027, and$19.9 million thereafter, assuming we do not refinance our indebtedness or enter into a new revolving credit facility. 58
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We believe our cash on hand in addition to our cash generated by operations will be sufficient to cover these obligations as well as the future cash requirements of being a public company. Non-GAAP Financial Measures In addition to our results determined in accordance withU.S. generally accepted accounting principles ("GAAP"), including, in particular operating income, net cash provided by operating activities, and net income, we believe that earnings before interest, taxes, depreciation and amortization, as adjusted for acquisition transaction costs, forgiveness of Paycheck Protection Program loans, gain from revaluation and settlement of seller notes and earnout liability, loss on early extinguishment of debt, and stock-based compensation ("Adjusted EBITDA"), a non-GAAP measure, is useful in evaluating our operating performance. The most directly comparable GAAP measure to Adjusted EBITDA is net income (loss).
The following table presents a reconciliation of Adjusted EBITDA to net loss for each of the periods presented:
Year Ended December 31,
2022 2021
Net Income (Loss) [1] $ 4,166,603 $ (1,507,097)
Add back (deduct):Amortization of intangible assets 1,953,819
1,953,818
Depreciation and amortization of property and equipment 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)
Gain on seller earnout revaluation -
(31,443)
Loss on early redemption of non-participating preferred units 590,689 41,622 Adjusted EBITDA$ 10,169,173 $ 6,357,603 __________________
[1] During the year ended
In addition to operating income and net income, we use Adjusted EBITDA as a measure of operational efficiency. We believe that this non-GAAP financial measure is useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results for the following reasons:
Adjusted EBITDA is widely used by investors and securities analysts to measure
a company's operating performance without regard to items such as depreciation
and amortization, interest expense, provision for income taxes, and certain
? one-time items such as acquisition transaction costs and gains from settlements
or loan forgiveness that can vary substantially from company to company
depending upon their financing, capital structures and the method by which
assets were acquired;
Our management uses Adjusted EBITDA in conjunction with GAAP financial measures
for planning purposes, including the preparation of our annual operating
? budget, as a measure of operating performance and the effectiveness of our
business strategies and in communications with our board of directors concerning our financial performance; and
Adjusted EBITDA provides consistency and comparability with our past financial
? performance, facilitates period-to-period comparisons of operations, and also
facilitates comparisons with other peer companies, many of which use similar
non-GAAP financial measures to supplement their GAAP results.
Our use of this non-GAAP financial measure has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP.
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Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with GAAP. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenue and expenses. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors and adjust those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from these estimates and assumptions. We believe estimates and assumptions associated with the evaluation of revenue recognition criteria, including the determination of revenue reporting as net versus gross in our revenue arrangements, as well as our determination of the fair value of goodwill and intangible assets, have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
Revenue recognition
We adoptedFinancial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("Topic 606"), as ofJanuary 1, 2019 , for all contracts not completed as of the date of adoption, which had no impact on our financial position or results of operations using the modified retrospective method. We recognize 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.
Our revenue is recognized primarily using inputs from third-party data, and to a lesser extent management estimates. We believe our estimates are not a significant element in our revenue recognition process. Our revenues are derived primarily from two sources: buy-side advertising and sell-side advertising.
Buy-side advertising
We purchase media based on the budget established by our customers with a focus
on leveraging data services, customer branding, real-time market analysis and
micro-location advertising. We offer our platform on a fully managed and a
moderate/self-serve basis, revenue from 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.
We provide digital advertising and media buying capabilities with a focus on
generating measurable digital and financial life for our 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 our contracts are
flat-rate, fee-based contracts.
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In instances where we contract 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 we are acting as the principal or an agent in the transaction. We are acting as the principal in these arrangements and therefore revenue earned and costs incurred are recognized on a gross basis, as we have control and are responsible for fulfilling the advertisement delivery, establishing the selling prices and delivering the advertisements for fully managed revenue and providing updates and performing billing and collection activities for our self-serve proprietary platform. Sell-side advertising We partner with publishers to sell advertising inventory to our existing buy-side clients, as well as our 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. We generate 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 our proprietary programmatic SSP. We refer to our publishers, app developers and channel partners collectively as our publishers. We generate revenue through the monetization of publisher ad impressions on our platform. Our 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. We recognize revenue when an ad is delivered in response to a winning bid request from ad buyers. We are acting as the principal in these arrangements and therefore revenue earned and costs incurred are recognized on a gross basis as we have control and are responsible for fulfilling the advertisement delivery, establishing the selling prices and the delivery of the advertisements for fully managed revenue and providing updates and performing all billing and collection activities for our self-serve proprietary platform. We maintain agreements with each DSP in the form of written service agreements, which set out the terms of the relationship, including payment terms (typically 30 to 90 days) and access to its platform. In an effort to reduce the risk of nonpayment, we have insurance with a third-party carrier for our accounts receivable.
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 we determine 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. For the years endedDecember 31, 2022 and 2021, we did not recognize any goodwill impairment losses.
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 or using an accelerated method. Amortization is recorded as depreciation and amortization under operating expenses within our consolidated statements of operations and comprehensive loss. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. As ofDecember 31, 2022 , there were no events or changes in circumstances to indicate that the carrying amount of the assets
may
not be recoverable.
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Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.
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