Direct Digital Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; comparative periods ended June 30, 2021. Unaudited consolidated results. The company operates buy-side advertising businesses and the Colossus SSP sell-side platform. It completed its IPO and related Up-C restructuring in February 2022.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $21.26 million | $11.18 million | $32.63 million | $16.88 million |
| Gross profit | $8.34 million | $6.17 million | $13.12 million | $9.17 million |
| Gross margin | 39% | 55% | 40% | 54% |
| Operating income | $3.06 million | $2.52 million | $3.65 million | $2.49 million |
| Net income | $2.61 million | $1.66 million | $1.94 million | $0.85 million |
| Adjusted EBITDA | $3.57 million | $3.01 million | $4.69 million | $3.49 million |
Q2 revenue increased 90%; first-half revenue increased 93%. Sell-side revenue grew 477% in Q2 and 496% in the first half, while buy-side revenue grew 2% and 9%, respectively. Sell-side supplied over half of Q2 revenue. Gross margin declined primarily because of the change in revenue mix; sell-side cost of revenue was about 82% of segment revenue in both years. Operating expenses rose 44% in Q2 and 42% in the first half, reflecting staffing, commissions and public-company costs.
Cash flow: First-half operating cash flow was $73,514, down from $2.65 million in 2021, principally due to a $7.0 million increase in accounts receivable and working-capital timing. Investing cash flow was zero. Financing cash flow was $157,870 provided, compared with $752,718 used in 2021. Cash increased by $231,384 to $4.92 million.
Balance sheet and liquidity at June 30: Current assets were $20.55 million and current liabilities $18.09 million, for working capital of $2.46 million. Total assets were $45.86 million and total liabilities $41.13 million. Cash was $4.92 million; accounts receivable was $14.84 million. Debt included $21.73 million outstanding under the term loan, $0.40 million on the revolving facility and a $0.15 million EIDL loan; term-loan carrying value was net of financing costs. Management reported $1.89 million of revolver availability at quarter-end and said it expected resources to cover operations and maturing debt for at least 12 months.
Material changes and unusual items
- The February IPO generated approximately $11.2 million of net cash proceeds. The company used proceeds and existing cash for redemptions of common and preferred units; $3.96 million remained accrued at June 30 and was paid July 28.
- The PPP-2 loan forgiveness generated $287,143 of Q2 income. First-half results also included a $590,689 loss on redemption of Class B preferred units.
- On July 26, 2022, the company repaid the $400,000 revolver and terminated that facility. On July 28, DDH LLC drew $4.26 million under the term loan delayed-draw feature, used primarily to complete the unit redemption and pay related costs. The company also joined as a guarantor of the term loan.
- A vendor litigation settlement was agreed on July 28 for $515,096, payable in monthly installments over 24 months beginning September 2022.
- The company adopted lease accounting in 2022 and recorded $886,057 of operating lease liabilities at June 30. It also recorded a $2.75 million tax receivable agreement liability and a $3.20 million net deferred tax asset related primarily to the Up-C structure.
Outlook, commentary and risks
No numerical revenue or earnings guidance is provided. Management described growth opportunities in programmatic advertising, publisher relationships and underserved markets, and expected to transition its server platform to HPE GreenLake in the second half of 2022. Management anticipated continued investment in staffing, systems, automation and public-company compliance. It cited seasonality: buy-side activity typically strengthens in the second and third quarters, while sell-side advertising often benefits from fourth-quarter holiday budgets.
Risks highlighted include advertising demand and economic downturns; customer concentration; platform reliability, technology and cybersecurity; privacy rules and restrictions on cookies or mobile identifiers; competition; and possible effects of COVID-19. Customer A accounted for 55.5% of Q2 revenue and 79.6% of receivables at June 30. The company noted that customer collections and supplier payment timing can materially affect cash flow. It reported compliance with financial covenants at June 30 and effective disclosure controls; management cautioned that actual results may differ from forward-looking statements.
Most important facts for investors to verify
- Whether rapid sell-side growth can be sustained and whether margins stabilize as the business mix evolves.
- Customer A’s concentration in revenue and receivables, collection timing, and exposure to customer credit risk.
- Post-quarter debt and liquidity after the $4.26 million delayed-draw borrowing, revolver termination, redemption payment and settlement obligations.
- Term-loan interest-rate terms, repayment schedule, covenants and the company’s guarantor obligations.
- Cash conversion: operating cash flow fell sharply despite higher net income, largely because of receivables and working-capital movements.