UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020March 31, 2021
OR
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to __________
Digital Media Solutions, Inc.
(Exact name of Registrant as specified in its charter)
| | | | | | | | |
| Delaware | 001-38393 | 98-1399727 |
| (State of incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) |
| | |
| 4800 140th Avenue N. , Suite 101, Clearwater, Florida | 33762 |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant's telephone number, including area code: (877) 236-8632
Leo Holdings Corp.
21 Grosvenor Place
London, SW1X 7HF
(Former Name or Former Address, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Class A common stock, $0.0001 par value per share | | DMS | | New York Stock Exchange |
| Redeemable warrants to acquire Class A common stock | | DMS WS | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| Large accelerated filer | ☐ | Accelerated filer | ☒ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
| | Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 6, 2020, 32,392,577May 13, 2021, 35,281,699 shares of the registrant’s Class A common stock; 25,999,464 of the registrant’s Class B common stock, par value $0.0001 per share; and 14,000,00013,999,998 warrants to purchase shares of the registrant’s Class A common stock, par value $0.0001 per share, were issued and outstanding.
Digital Media Solutions, Inc.
Table of Contents
| | | | | | | | |
| | Page No. |
| | |
| |
| Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| Item 5. | | |
| Item 6. | | |
| |
Cautionary Note Regarding Forward-Looking Statements
References in this document to the “Registrant,” “DMS Inc.,” “DMS,” the “Company,” “we,” “management,” “us” or “our” refers to Digital Media Solutions, Inc. and its consolidated subsidiaries, except where the context otherwise requires or indicates.
This report, particularly Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and Part II. Item 1A. Risk Factors, and the documents we incorporate into this report contain certain statements that are, or may be deemed to be, forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are made in reliance upon the protections provided by such acts for forward-looking statements. SuchThese forward looking statements are often identified by words such as “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believes,” “predicts,” “potential,” “continue,” and similar expressions. These forward-looking statements include, without limitation, DMS’s expectations with respect to its future performance and its ability to implement its strategy, and are based on the beliefs and expectations of our management team from the information available at the time such statements are made. These forward-looking statements involve significant risks and uncertainties that could cause the actual results to differ materially from the expected results. Most of these factors are outside DMS’s control and are difficult to predict. Factors that may cause such differences include, but mayare not be limited to, projections of financial or operational performance, our beliefs regarding potential government actions or changes in laws and regulations, anticipated costs and benefits of proposed investments, financing needs or plans, estimates concerningto: (1) the effects of litigationCOVID-19 pandemic or other disputes, the occurrence of unanticipated expenses,public health crises; (2) changes in client demand for our services and our ability to adapt to such changes,changes; (3) the entry of new competitors in the market,market; (4) the ability to maintain and attract clientsconsumers and advertisers in the face of changing economic or competitive conditions,conditions; (5) the impactability to maintain, grow and protect the data DMS obtains from consumers and advertisers; (6) the performance of DMS’s technology infrastructure; (7) the COVID-19 pandemicability to protect DMS’s intellectual property rights; (8) the ability to successfully source and complete acquisitions and to integrate the operations of companies DMS acquires, including the Crisp Results assets and Aimtell, PushPros and Aramis Interactive; (9) the ability to improve and maintain adequate internal controls over financial and management systems, and remediate the identified material weakness; (10) changes in applicable laws or regulations and the ability to maintain compliance; (11) our substantial levels of indebtedness; (12) volatility in the trading price on the globalNYSE of our common stock and U.S. macro-economic environments as well as assumptions as to anywarrants; (13) fluctuations in value of the foregoingour private placement warrants; and all statements that are not based on historical fact but rather reflect our current expectations concerning future results and events. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, refer to the Risk Factors and MD&A sections. In addition, when used in this discussion, the terms “anticipate,” “assume,” “estimate,” “expect,” “intend,” “plan,” “believe,” “will,” “may,” “likely,” “could,” “should,” “future” and variations thereof and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to(14) other risks and uncertainties someindicated from time to time in DMS’s filings with the SEC, including those under “Risk Factors” in DMS’s Annual Report on Form 10-K and its subsequent filings with the SEC.
There may be additional risks that we consider immaterial or which cannot be predicted. Future eventsare unknown, and actual results could differ materially from those set forth init is not possible to predict or underlyingidentify all such risks.
DMS cautions that the forward-looking statements. Readers are cautionedforegoing list of factors is not exclusive. DMS cautions readers not to place undue reliance onupon any forward-looking statements, contained in this report, which speak only as of the date of this report. The Company undertakes nomade. DMS does not undertake or accept any obligation or undertaking to updaterelease publicly any updates or revisions to any forward-looking statements.statements to reflect any change in its expectations or any change in events, conditions or circumstances on which any such statement is based.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DIGITAL MEDIA SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except par value)per share data)
| | | September 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 As Restated |
| | ASSETS | ASSETS | | ASSETS | |
| Current assets: | Current assets: | | Current assets: | |
| Cash | $ | 24,500 | | | $ | 3,008 | | |
| Accounts receivable, net of allowances of $875 and $683, respectively | 38,656 | | | 30,137 | | |
| Cash and cash equivalents | | Cash and cash equivalents | $ | 23,866 | | | $ | 31,397 | |
| Accounts receivable, net of allowances of $3,526 and $3,121, respectively | | Accounts receivable, net of allowances of $3,526 and $3,121, respectively | 46,496 | | | 42,085 | |
| Prepaid and other current assets | Prepaid and other current assets | 2,727 | | | 2,217 | | Prepaid and other current assets | 2,799 | | | 2,943 | |
| Income tax receivable | | Income tax receivable | 474 | | | 474 | |
| Total current assets | Total current assets | 65,883 | | | 35,362 | | Total current assets | 73,635 | | | 76,899 | |
| Property and equipment, net | Property and equipment, net | 13,662 | | | 8,728 | | Property and equipment, net | 16,528 | | | 15,016 | |
| Goodwill | Goodwill | 44,368 | | | 41,826 | | Goodwill | 49,757 | | | 44,904 | |
| Intangible assets, net | Intangible assets, net | 50,275 | | | 57,935 | | Intangible assets, net | 61,029 | | | 46,447 | |
| Deferred tax assets | Deferred tax assets | 18,522 | | | 0 | | Deferred tax assets | 18,826 | | | 18,948 | |
| Other assets | Other assets | 285 | | | 254 | | Other assets | 206 | | | 206 | |
| Total assets | Total assets | $ | 192,995 | | | $ | 144,105 | | Total assets | $ | 219,981 | | | $ | 202,420 | |
| LIABILITIES AND DEFICIT | LIABILITIES AND DEFICIT | | | | LIABILITIES AND DEFICIT | | | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Accounts payable | Accounts payable | $ | 28,433 | | | $ | 24,160 | | Accounts payable | $ | 37,529 | | | $ | 37,191 | |
| Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | 10,798 | | | 10,839 | | Accrued expenses and other current liabilities | 7,178 | | | 9,886 | |
| Current portion of long-term debt | Current portion of long-term debt | 4,150 | | | 4,150 | | Current portion of long-term debt | 7,141 | | | 7,967 | |
| Income tax payable | | Income tax payable | 2,546 | | | 1,413 | |
| Short-term Tax Receivable Agreement liability | | Short-term Tax Receivable Agreement liability | 510 | | | 510 | |
| Contingent consideration payable | Contingent consideration payable | 0 | | | 1,000 | | Contingent consideration payable | 0 | | | 0 | |
| Total current liabilities | Total current liabilities | 43,381 | | | 40,149 | | Total current liabilities | 54,904 | | | 56,967 | |
| Commitments and contingencies (Note 12) | Commitments and contingencies (Note 12) | | Commitments and contingencies (Note 12) | 0 | | 0 |
| Long-term debt | Long-term debt | 197,059 | | | 201,048 | | Long-term debt | 192,786 | | | 193,591 | |
| Long-term TRA liability | 15,174 | | | 0 | | |
| Long-term Tax Receivable Agreement liability | | Long-term Tax Receivable Agreement liability | 15,760 | | | 15,760 | |
| Deferred tax liability | Deferred tax liability | 7,514 | | | 8,675 | | Deferred tax liability | 5,886 | | | 7,024 | |
| Private Placement Warrant liabilities | | Private Placement Warrant liabilities | 22,390 | | | 22,080 | |
| Contingent consideration payable - noncurrent | | Contingent consideration payable - noncurrent | 5,307 | | | 0 | |
| Other non-current liabilities | Other non-current liabilities | 537 | | | 491 | | Other non-current liabilities | 2,484 | | | 2,683 | |
| Total liabilities | Total liabilities | 263,665 | | | 250,363 | | Total liabilities | 299,517 | | | 298,105 | |
| Stockholders' deficit: | Stockholders' deficit: | | Stockholders' deficit: | |
| Preferred stock, $0.0001 par value, 100,000 shares authorized; NaN issued and outstanding at September 30, 2020 | 0 | | | 0 | | |
| Class A common stock, $0.0001 par value, 500,000 shares authorized; 32,294 issued and outstanding at September 30, 2020 | 3 | | | 0 | | |
| Class B common stock, $0.0001 par value, 60,000 shares authorized; 25,857 issued and outstanding at September 30, 2020 | 3 | | | 0 | | |
| Class C common stock, $0.0001 par value, 40,000 authorized; NaN issued and outstanding at September 30, 2020 | 0 | | | 0 | | |
| Preferred stock, $0.0001 par value, 100,000 shares authorized; NaN issued and outstanding at March 31, 2021 | | Preferred stock, $0.0001 par value, 100,000 shares authorized; NaN issued and outstanding at March 31, 2021 | 0 | | | 0 | |
| Class A common stock, $0.0001 par value, 500,000 shares authorized; 33,687 issued and outstanding at March 31, 2021 | | Class A common stock, $0.0001 par value, 500,000 shares authorized; 33,687 issued and outstanding at March 31, 2021 | 3 | | | 3 | |
| Class B common stock, $0.0001 par value, 60,000 shares authorized; 25,999 issued and outstanding at March 31, 2021 | | Class B common stock, $0.0001 par value, 60,000 shares authorized; 25,999 issued and outstanding at March 31, 2021 | 3 | | | 3 | |
| Class C common stock, $0.0001 par value, 40,000 authorized; NaN issued and outstanding at March 31, 2021 | | Class C common stock, $0.0001 par value, 40,000 authorized; NaN issued and outstanding at March 31, 2021 | 0 | | | 0 | |
| Additional paid-in capital | Additional paid-in capital | (43,145) | | | 0 | | Additional paid-in capital | (37,261) | | | (48,027) | |
| Retained earnings | Retained earnings | 5,342 | | | 0 | | Retained earnings | (3,265) | | | (3,146) | |
| Total stockholders' deficit | Total stockholders' deficit | (37,797) | | | 0 | | Total stockholders' deficit | (40,520) | | | (51,167) | |
| Non-controlling interest | Non-controlling interest | (32,873) | | | 0 | | Non-controlling interest | (39,016) | | | (44,518) | |
| Member deficit | 0 | | | (106,258) | | |
| Total deficit | Total deficit | (70,670) | | | (106,258) | | Total deficit | (79,536) | | | (95,685) | |
| Total liabilities and deficit | Total liabilities and deficit | $ | 192,995 | | | $ | 144,105 | | Total liabilities and deficit | $ | 219,981 | | | $ | 202,420 | |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
DIGITAL MEDIA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)data)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | |
| | Net revenue | Net revenue | $ | 82,829 | | | $ | 57,575 | | | $ | 230,753 | | | $ | 173,142 | | Net revenue | $ | 96,803 | | | $ | 72,728 | | | |
| Cost of revenue | Cost of revenue | 57,777 | | | 39,101 | | | 160,338 | | | 117,084 | | Cost of revenue | 69,182 | | | 50,159 | | | |
| | Salaries and related costs | Salaries and related costs | 7,882 | | | 6,599 | | | 24,114 | | | 20,495 | | Salaries and related costs | 10,269 | | | 8,331 | | | |
| General and administrative expenses | General and administrative expenses | 6,407 | | | 4,479 | | | 16,356 | | | 13,514 | | General and administrative expenses | 6,962 | | | 5,297 | | | |
| Acquisition costs | Acquisition costs | 3,248 | | | 11,707 | | | 3,322 | | | 17,492 | | Acquisition costs | 1,494 | | | 27 | | | |
| Depreciation and amortization | Depreciation and amortization | 4,636 | | | 2,201 | | | 13,307 | | | 6,165 | | Depreciation and amortization | 5,419 | | | 4,315 | | | |
| Income (loss) from operations | Income (loss) from operations | 2,879 | | | (6,512) | | | 13,316 | | | (1,608) | | Income (loss) from operations | 3,477 | | | 4,599 | | | |
| Interest expense | Interest expense | 3,421 | | | 2,980 | | | 10,702 | | | 7,389 | | Interest expense | 3,257 | | | 3,790 | | | |
| Change in fair value of warrant liabilities | | Change in fair value of warrant liabilities | 315 | | | 0 | | | |
| Net (loss) income before income taxes | Net (loss) income before income taxes | (542) | | | (9,492) | | | 2,614 | | | (8,997) | | Net (loss) income before income taxes | (95) | | | 809 | | | |
| Income tax expense | Income tax expense | 1,636 | | | 0 | | | 1,901 | | | 0 | | Income tax expense | 117 | | | 52 | | | |
| Net (loss) income | Net (loss) income | (2,178) | | | (9,492) | | | 713 | | | (8,997) | | Net (loss) income | (212) | | | 757 | | | |
| Net loss attributable to non-controlling interest | Net loss attributable to non-controlling interest | (3,315) | | | 0 | | | (424) | | | 0 | | Net loss attributable to non-controlling interest | (93) | | | 0 | | | |
| Net income (loss) attributable to Digital Media Solutions, Inc. | Net income (loss) attributable to Digital Media Solutions, Inc. | $ | 1,137 | | | $ | (9,492) | | | $ | 1,137 | | | $ | (8,997) | | Net income (loss) attributable to Digital Media Solutions, Inc. | $ | (119) | | | $ | 757 | | | |
| | Earnings (loss) per share attributable to Digital Media Solutions, Inc.: | Earnings (loss) per share attributable to Digital Media Solutions, Inc.: | Earnings (loss) per share attributable to Digital Media Solutions, Inc.: |
| Basic and diluted | Basic and diluted | $ | 0.04 | | | N/A | | $ | 0.04 | | | N/A | Basic and diluted | $ | 0.00 | | | N/A1 | | |
| | | Weighted-average shares outstanding - basic and diluted | Weighted-average shares outstanding - basic and diluted | 32,294 | | | N/A | | 32,294 | | | N/A | Weighted-average shares outstanding - basic and diluted | 33,241 | | | N/A | | |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
1Prior to the Business Combination, the membership structure of Digital Media Solutions, LLC included units which had profit interests. The Company analyzed the calculation of earnings per unit for periods prior to the Business Combination (as defined in Note 1. Summary of Significant Accounting Policies) and determined that it resulted in values that would not be meaningful to the users of these consolidated financial statements. Therefore, earnings per share information has not been presented for periods prior to the Business Combination on July 15, 2020.
DIGITAL MEDIA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
(Unaudited)
(in thousands)thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A
Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Total
Stockholders' Deficit | | Non-
controlling
Interest | | Members'
Deficit | | |
| Shares | | Amount | | Shares | | Amount | | | | | | | Total |
| | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2019 | 0 | | | $ | 0 | | | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (106,258) | | | $ | (106,258) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 757 | | | 757 | |
| Member distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (170) | | | (170) | |
| Balance, March 31, 2020 | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (105,671) | | | (105,671) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,134 | | | 2,134 | |
| Balance, June 30, 2020 | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (103,537) | | | (103,537) | |
| Net income | — | | | — | | | — | | | — | | | | | 1,137 | | | 1,137 | | | 921 | | | (4,236) | | | (2,178) | |
| | | | | | | | | | | | | | | | | | | |
| Proceeds and shares issued in the Business Combination and the Conversion (Note 2) | 32,294 | | | 3 | | | 25,857 | | | 3 | | | (45,006) | | | 4,205 | | | (40,795) | | | (34,933) | | | 107,773 | | | 32,045 | |
| DMSH units issued in SmarterChaos acquisition (Note 7) | — | | | — | | | — | | | — | | | 1,861 | | | — | | | 1,861 | | | 1,139 | | | — | | | 3,000 | |
| Balance, September 30, 2020 | 32,294 | | | $ | 3 | | | 25,857 | | | $ | 3 | | | $ | (43,145) | | | $ | 5,342 | | | $ | (37,797) | | | $ | (32,873) | | | $ | 0 | | | $ | (70,670) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A
Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Total
Stockholders' Deficit | | Non-
controlling
Interest | | |
| Shares | | Amount | | Shares | | Amount | | | | | | Total Deficit |
| | | | | | | | | | | | | | | | | |
| Balance, December 31, 2020 | 32,393 | | | $ | 3 | | | 25,999 | | | $ | 3 | | | $ | (48,027) | | | $ | (3,146) | | | $ | (51,167) | | | $ | (44,518) | | | $ | (95,685) | |
| Net income (loss) | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | $ | (119) | | | $ | (119) | | | $ | (93) | | | $ | (212) | |
| Shares issued in connection with acquisition of Aramis, PushPros and Aimtell (Note 8) | 1,293 | | | $ | — | | | — | | | $ | — | | | $ | 9,384 | | | $ | — | | | $ | 9,384 | | | $ | 5,616 | | | $ | 15,000 | |
| Exercise of warrants to issue Class A common stock | 1 | | | $ | — | | | — | | | $ | — | | | $ | 17 | | | $ | — | | | $ | 17 | | | $ | — | | | $ | 17 | |
| Stock-based compensation | — | | | $ | — | | | — | | | $ | — | | | $ | 1,365 | | | $ | — | | | $ | 1,365 | | | $ | — | | | $ | 1,365 | |
| Other | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (21) | | | $ | (21) | |
| Balance, March 31, 2021 | 33,687 | | | $ | 3 | | | 25,999 | | | $ | 3 | | | $ | (37,261) | | | $ | (3,265) | | | $ | (40,520) | | | $ | (39,016) | | | $ | (79,536) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A
Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Total
Stockholders' Deficit | | Non-
controlling
Interest | | Members'
Deficit | | |
| Shares | | Amount | | Shares | | Amount | | | | | | | Total |
| Balance, December 31, 2018 | 0 | | | $ | 0 | | | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (73,403) | | | $ | (73,403) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 606 | | | 606 | |
| Member distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,148) | | | (2,148) | |
| Balance, March 31, 2019 | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (74,945) | | | (74,945) | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (111) | | | (111) | |
| Member distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (7,194) | | | (7,194) | |
| Balance, June 30, 2019 | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (82,250) | | | (82,250) | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (9,492) | | | (9,492) | |
| Member distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (12,251) | | | (12,251) | |
| Balance, September 30, 2019 | 0 | | | $ | 0 | | | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (103,993) | | | $ | (103,993) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A
Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Total
Stockholders' Deficit | | Non-
controlling
Interest | Members’ Deficit | |
| Shares | | Amount | | Shares | | Amount | | | | | Total Deficit |
| Balance, December 31, 2019 | 0 | | | $ | 0 | | | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | $ | (106,258) | | $ | (106,258) | |
| Net income | — | | | $ | 0 | | | — | | | $ | 0 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | 757 | | $ | 757 | |
| Member distributions | — | | | $ | 0 | | | — | | | $ | 0 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | $ | (170) | | $ | (170) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance, March 31, 2020 | 0 | | | $ | 0 | | | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | $ | 0 | | $ | (105,671) | |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
DIGITAL MEDIA SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
| Cash flows from operating activities | Cash flows from operating activities | | | | Cash flows from operating activities | | | |
| Net income (loss) | Net income (loss) | $ | 713 | | | $ | (8,997) | | Net income (loss) | $ | (212) | | | $ | 757 | |
| Adjustments to reconcile net income to net cash provided by operating activities | Adjustments to reconcile net income to net cash provided by operating activities | | Adjustments to reconcile net income to net cash provided by operating activities | |
| Depreciation and amortization | Depreciation and amortization | 13,307 | | | 6,165 | | Depreciation and amortization | 5,419 | | | 4,315 | |
| | Lease restructuring charges | | Lease restructuring charges | (303) | | | 0 | |
| Provision for bad debt | | Provision for bad debt | 410 | | | 143 | |
| Stock-based compensation | | Stock-based compensation | 1,257 | | | 0 | |
| Payment of contingent consideration | Payment of contingent consideration | (1,000) | | | (15,904) | | Payment of contingent consideration | 0 | | | (1,000) | |
| Amortization of debt issuance costs | Amortization of debt issuance costs | 699 | | | 409 | | Amortization of debt issuance costs | 233 | | | 280 | |
| Deferred income tax provision, net | Deferred income tax provision, net | (1,261) | | | 0 | | Deferred income tax provision, net | (1,016) | | | (490) | |
| Change in fair value of contingent consideration | | Change in fair value of contingent consideration | 382 | | | 0 | |
| Change in fair value of warrant liability | | Change in fair value of warrant liability | 315 | | | 0 | |
| Change in income tax receivable and payable | | Change in income tax receivable and payable | 1,133 | | | 0 | |
| Change in accounts receivable, net | Change in accounts receivable, net | (7,686) | | | (1,889) | | Change in accounts receivable, net | (1,069) | | | (4,870) | |
| Change in prepaid expenses and other current assets | Change in prepaid expenses and other current assets | (495) | | | (837) | | Change in prepaid expenses and other current assets | 367 | | | (1,188) | |
| Change in accounts payable and accrued expenses | Change in accounts payable and accrued expenses | 3,210 | | | (3,680) | | Change in accounts payable and accrued expenses | (5,703) | | | 3,174 | |
| Change in contingent consideration payable | 0 | | | 13,841 | | |
| | Change in other liabilities | Change in other liabilities | (136) | | | (131) | | Change in other liabilities | (24) | | | (12) | |
| Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | 7,351 | | | (11,023) | | Net cash provided by (used in) operating activities | $ | 1,189 | | | $ | 1,109 | |
| Cash flows from investing activities | Cash flows from investing activities | | Cash flows from investing activities | |
| Additions to property and equipment | Additions to property and equipment | (7,481) | | | (4,566) | | Additions to property and equipment | $ | (2,391) | | | $ | (2,976) | |
| Acquisition of businesses, net of cash acquired | Acquisition of businesses, net of cash acquired | (2,799) | | | 0 | | Acquisition of businesses, net of cash acquired | (4,454) | | | 0 | |
| Other | 0 | | | (14) | | |
| | Net cash used in investing activities | Net cash used in investing activities | (10,280) | | | (4,580) | | Net cash used in investing activities | $ | (6,845) | | | $ | (2,976) | |
| Cash flows from financing activities | Cash flows from financing activities | | Cash flows from financing activities | |
| Proceeds from Business Combination | 29,278 | | | 0 | | |
| Proceeds from issuance of long-term debt | 0 | | | 39,000 | | |
| Payments of long-term debt | (3,423) | | | (1,739) | | |
| | Payments of long-term debt and notes payable | | Payments of long-term debt and notes payable | $ | (1,865) | | | $ | (1,037) | |
| Proceeds from borrowings on revolving credit facilities | Proceeds from borrowings on revolving credit facilities | 10,000 | | | 5,500 | | Proceeds from borrowings on revolving credit facilities | 0 | | | 10,000 | |
| Payments of borrowings on revolving credit facilities | (11,000) | | | (1,500) | | |
| Proceeds from warrants exercised | | Proceeds from warrants exercised | 11 | | | 0 | |
| | Payment of debt issuance costs | Payment of debt issuance costs | (264) | | | (719) | | Payment of debt issuance costs | 0 | | | (22) | |
| Payment of contingent consideration payable | 0 | | | (7,011) | | |
| | | Distributions to members | Distributions to members | (170) | | | (21,593) | | Distributions to members | (21) | | | (170) | |
| Net cash provided by financing activities | 24,421 | | | 11,938 | | |
| Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | $ | (1,875) | | | $ | 8,771 | |
| Net change in cash | Net change in cash | 21,492 | | | (3,665) | | Net change in cash | $ | (7,531) | | | $ | 6,904 | |
| Cash, beginning of period | Cash, beginning of period | 3,008 | | | 4,589 | | Cash, beginning of period | 31,397 | | | 3,008 | |
| Cash, end of period | Cash, end of period | $ | 24,500 | | | $ | 924 | | Cash, end of period | $ | 23,866 | | | $ | 9,912 | |
| | Supplemental Disclosure of Cash Flow Information | Supplemental Disclosure of Cash Flow Information | | Supplemental Disclosure of Cash Flow Information | |
| Cash Paid During the Period For: | Cash Paid During the Period For: | | Cash Paid During the Period For: | |
| Interest | Interest | $ | 10,070 | | | $ | 2,798 | | Interest | $ | 3,098 | | | $ | 3,612 | |
| Income taxes, net | Income taxes, net | 1,570 | | | 0 | | Income taxes, net | $ | 0 | | | $ | 0 | |
| Non-Cash Investing and Financing Transactions: | Non-Cash Investing and Financing Transactions: | | Non-Cash Investing and Financing Transactions: | |
| Issuance of equity for SmarterChaos acquisition | $ | 3,000 | | | $ | 0 | | |
| Issuance of equity for Aramis, Aimtell & PushPros | | Issuance of equity for Aramis, Aimtell & PushPros | $ | 15,000 | | | $ | 0 | |
| Capital expenditures included in accounts payable | Capital expenditures included in accounts payable | 138 | | | 284 | | Capital expenditures included in accounts payable | $ | 391 | | | $ | 258 | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
DIGITAL MEDIA SOLUTIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Digital Media Solutions, Inc. (“DMS Inc.”) is a digital performance marketing company offering a diversified lead and software delivery platform that drives high value and high intent leads to its customers. As used in this report,Quarterly Report, the “Company” refers to DMS Inc. and its consolidated subsidiaries, (including its wholly-owned subsidiary, CEP V DMS US Blocker Company, a Delaware corporation (“Blocker”)). The Company is headquartered in Clearwater, Florida, with satellite offices throughout the United States and Canada. The Company primarily operates and derives most of its revenues in the United States.
Leo Holdings Corp. (“Leo”) as a special purpose acquisition company, was incorporated on November 29, 2017 as a Cayman Islands exempted company under the name for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving the Company and one or more businesses. On July 15, 2020, Leo consummated a transaction structured similar to a reverse recapitalization (the “Business Combination”) and domesticated as a corporation incorporated in the state of Delaware. At the closing of the Business Combination (the “Closing”), DMS Inc.Leo acquired the equity in Blocker and a portion of the equity of Digital Media Solutions Holding, LLC (“DMSH”) and Blocker became the sole managing member of DMSH, and Leo was renamed Digital Media Solutions, Inc.
The business combinationBusiness Combination was structured as a reverse recapitalization. The historical operations of DMSH are deemed to be those of the Company. Thus, the financial statements included in this reportQuarterly Report reflect (i) the historical operating results of DMSH prior to the Business Combination; (ii) the combined results of the Company following the Business Combination; (iii) the assets and liabilities of Leo at historical cost; and (iv) the Company’s equity and earnings (loss) per share for all periods presented. Refer to Note 2. Business Combination for additional discussion related to the transaction.
Unless otherwise noted below, there have been no material changes
The Company operates as a performance marketing engine for companies across numerous industries, including consumer finance (mortgage), education (split between non-profit and for-profit), automotive (aftermarket auto warranty, auto insurance), insurance (health, homeowners), home services (home security), brand performance (consumer products), gig, health and wellness, and career (job pursuit). Through its agency business, DMS provides access and control over the advertising spend of clients, and also offers marketing automation software as a service (SaaS) to clients.
The Company has organized its operations into 3 reportable segments. The Brand Direct reportable segment consists of services delivered against an advertiser’s brand, while the significant accounting policies presented in Note 2. BasisMarketplace reportable segment is made up of Presentationservices delivered directly against the DMS brand. In the Other reportable segment, services offered by DMS include software services, and Summary of Significant Accounting Policies, to the DMSH consolidated financial statements for the fiscal year ended December 31, 2019, included in the Company’s prospectusdigital media services that forms a partare managed on behalf of the Form S-1 registration statement filed withcustomer (i.e., Managed services).
Restatement of Previously Issued Financial Statements
On April 12, 2021, the Acting Director of the Division of Corporation Finance and Acting Chief Accountant of the Securities and Exchange Commission together issued a statement regarding the accounting and reporting considerations for warrants issued by special purpose acquisition companies entitled “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SEC”SPACs”) (the “SEC Statement”). Specifically, the SEC Statement focused in part on August 7,provisions in warrant agreements that provide for potential changes to the settlement amounts dependent upon the characteristics of the warrant holder, and because the holder of a warrant is not an input into the pricing of a fixed-for-fixed option on equity shares, such provision would preclude the warrant from being classified in equity and thus the warrant should be classified as a liability. As a result of the SEC Statement, the Company reevaluated the accounting treatment of the Company’s Warrants issued in connection with the Business Combination Agreement, dated April 23, 2020, as amended on July 2, 2020 (the “2020 S-1”“Business Combination”) and recorded in equity in the Company’s consolidated balance sheet as a result of the Business Combination occurring on July 15, 2020. Because the Company’s Private Placement Warrants contain provisions whereby the settlement amount varies depending upon the characteristics of the warrant holder, the Private Placement Warrants should have been recorded at fair value as a liability in the Company’s consolidated balance sheet. There was no change to the Company’s Public Warrants as a result of the SEC Statement and the Company’s reevaluation, and therefore the Public Warrants continue to be classified in equity.
Accordingly, due to this restatement, the Private Placement Warrants are now classified as a liability at fair value on the Company’s consolidated balance sheet at December 31, 2020, as well as of the date of the Business Combination, and the change in the fair value of such liability in each period is recognized as a gain or loss in the Company’s consolidated statements
of earnings (loss) and comprehensive income (loss). The restatement of the financial statements has no effect on the Company’s liquidity, cash or cash flows from operating activities.
The Warrants continue to be deemed equity instruments for income tax purposes and, accordingly, there is no tax accounting relating to changes in the fair value of the Private Placement Warrants recognized for book purposes.
As a result of classifying the Private Placement Warrants as liabilities, a portion of our transaction issuance costs that were previously included in equity were allocated to the Private Placement Warrants and recorded as general and administrative expenses.
When presenting diluted earnings (loss) per share in this Quarterly Report, the shares issuable under the Private Placement Warrants were considered for inclusion in the diluted share count in accordance with U.S. generally accepted accounting principles (“GAAP”). Since the shares issuable under the Private Placement Warrants are issuable shares when exercised by the holders, they are included when computing diluted earnings (loss) per share to the extent such exercise is dilutive to EPS. Upon exercise, these shares will be included in Class A common stock in the Company’s basic EPS share count from the date of issuance. Also, upon exercise, the liability would be extinguished and the fair value at the time of the exercise of the shares issued in settlement will be recorded as an increase in equity.
The Company’s policy is to recognize Private Placement Warrants as a liability and to recognize the fair value adjustments through mark-to market analysis into earnings for every period the balance sheets and the statement of operations is presented.
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”)GAAP and applicable rules and regulations of the SEC regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the 2020 S-1. The Unaudited Condensed Consolidated Balance Sheet at December 31, 2019 was derived from the audited Consolidated Balance Sheet as of December 31, 2019, as presented in the 2020 S-1. In management’s opinion, these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary for a fair presentation.SEC.
Principles of Consolidation
The Company consists of DMS Inc. and its wholly-owned subsidiary, Blocker. Pursuant to the Business Combination, DMS Inc. acquired, directly and through its acquisition of the equity of Blocker, approximately 55.5% of the membership interest in DMSH, while the Sellers (as defined in Note 2. Business Combination) retained approximately 44.5% of the membership interest in DMSH (“non-controlling interests”).
The Company consolidates the assets, liabilities and operating results of DMSH and its wholly-owned subsidiaries. All intercompany activitytransactions and balances have been eliminated as part of thein consolidation.
The results of operations attributable to the non-controlling interests are included in the Company’s unaudited condensed consolidated statements of operations, and the non-controlling interests are reported as a separate component of equity.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported as separate financial statement line items in the unaudited condensed consolidated financial statements. Actual results could differ from those estimates. Management regularly makes estimates and assumptions that are inherent in the preparation of the consolidated financial statements including, but not limited to, the fair value of private placement warrants, the allowance for doubtful accounts, stock-based compensation, fair value of net assets acquired in business combinations, loss contingencies, asset impairments, and deferred taxes and amounts associated with the Tax Receivable Agreement related to the Business Combination.
Revenue recognition
The Company derives revenue primarily from fees earned through the delivery of qualified clicks, leads, inquiries, calls, applications, customers and, to a lesser extent, display advertisements, or impressions. The Company recognizes revenue when the Company transfers promised goods or services to clients in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company recognizes revenue pursuant to the five-step framework contained in Accounting Standards Update (“ASC”) 606, Revenue from Contracts with Customers: (i) identify the contract with a client; (ii) identify the performance obligations in the contract, including whether they are distinct in the context of the contract; (iii) determine the transaction price, including the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligations.
As part of determining whether a contract exists, probability of collection is assessed on a client-by-client basis at the outset of the contract. Clients are subjected to a credit review process that evaluates the client’s financial position and the ability and intention to pay. If it is determined from the outset of an arrangement that the client does not have the ability or intention to pay, the Company will conclude that a contract does not exist and will continuously reassess its evaluation until the Company is able to conclude that a contract does exist.
Generally, the Company’s contracts specify the period of time as one month, but in some instances the term may be longer. However, for most of the Company’s contracts with clients, either party can terminate the contract at any time without penalty. Consequently, enforceable rights and obligations only exist on a day-to-day basis, resulting in individual daily contracts during the specified term of the contract or until one party terminates the contract prior to the end of the specified term.
The Company has assessed the services promised in its contracts with clients and has identified one performance obligation, which is a series of distinct services. Depending on the client’s needs, these services consist of a specified number or an unlimited number of clicks, leads, calls, applications, customers, etc. (hereafter collectively referred to as “marketing results”) to be delivered over a period of time. The Company satisfies these performance obligations over time as the services are provided. The Company does not promise to provide any other significant goods or services to its clients.
Transaction price is measured based on the consideration that the Company expects to receive from a contract with a client. The Company’s contracts with clients contain variable consideration as the price for an individual marketing result varies on a day-to-day basis depending on the market-driven amount a client has committed to pay. However, because the Company ensures the stated period of its contracts does not generally span multiple reporting periods, the contractual amount within a period is based on the number of marketing results delivered within the period. Therefore, the transaction price for any given period is fixed and no estimation of variable consideration is required.
If a marketing result delivered to a client does not meet the contractual requirements associated with that marketing result, the Company’s contracts allow for clients to return a marketing result generally within 5-10 days of having received the marketing result. Such returns are factored into the amount billed to the client on a monthly basis and consequently result in a reduction to revenue in the same month the marketing result is delivered. No warranties are offered to the Company’s clients.
The Company does not allocate transaction price as the Company has only one performance obligation and its contracts do not generally span multiple periods. Taxes collected from clients and remitted to governmental authorities are not included in revenue. The Company elected to use the practical expedient which allows the Company to record sales commissions as expense as incurred when the amortization period would have been one year or less.
The Company bills clients monthly in arrears for the marketing results delivered during the preceding month. The Company’s standard payment terms are 30-60 days. Consequently, the Company does not have significant financing components in its arrangements.
Separately from the agreements the Company has with clients, the Company has agreements with Internet search companies, third-party publishers and strategic partners that we engage with to generate targeted marketing results for its clients. The Company receives a fee from its clients and separately pays a fee to the Internet search companies, third-party publishers and strategic partners. Other than certain of its managed services arrangements, the Company is the principal in the transaction. For the transactions where the Company is the principal, the fees paid by its clients are recognized as revenue and the fees paid to its Internet search companies, third-party publishers and strategic partners are included in cost of revenue.
Customer acquisition
The Company’s performance obligation for Customer acquisition contracts is to deliver an unspecified number of potential customers or leads (i.e., number of clicks, emails, calls and applications) to the customer in real-time, on a daily basis as the leads are generated, based on predefined qualifying characteristics specified by our customer. The contracts generally have a one-month term and the Company has an enforceable right to payment for all leads delivered to the customer. The Company’s customers simultaneously receive and consume the benefits provided, as the Company satisfies its performance obligations. The Company recognizes revenue as the performance obligations are satisfied over time.
When there is a delay between the period in which revenue is recognized and when a customer invoice is issued, revenue is recognized and the corresponding amounts are recorded as unbilled revenue (i.e., contract assets) within Accounts receivable, net on the consolidated balance sheets. In line with industry practice, the Company applies the constraint on variable consideration and records revenue based on internally tracked conversions (leads delivered), net of the amount tracked and subsequently confirmed by customers. Substantially all amounts included within the unbilled revenue balance are invoiced to customers within the month directly following the period of service. Historical estimates related to unbilled revenue have not been materially different from actual revenue billed.
Managed services
The Company’s performance obligation for Managed service contracts is to provide continuous service of managing the customer’s media spend for the purpose of generating leads through a third-party supplier of leads, as requested by our customer. Each month of service is distinct, and any variable consideration is allocated to a distinct month. Therefore, revenue is recognized as the performance obligation is satisfied each month and there is no estimation of revenue required at each reporting period for managed services contracts.
The Company enters into agreements with Internet search companies, third-party publishers and/or strategic partners to generate customer acquisition services for their Managed service customers. The Company receives a fee from its customers and separately pays a fee to the Internet search companies, third-party publishers and/or strategic partners. The third-party supplier is primarily responsible for the performance and deliverable to the customer, and the Company solely arranges for the third-party supplier to provide services to the customer. Therefore, in certain cases, the Company acts as the agent and the net fees earned by the Company are recorded as revenue, with no associated costs of revenue attributable to the Company.
Software services
The Company’s performance obligation for Software services contracts is to provide the customer with continuous, daily access to the Company’s proprietary software. Service provided each month is distinct, and any variable consideration is allocated to a distinct month. Therefore, revenue is recognized as the performance obligations are satisfied each month and there is no estimation of revenue required at each reporting period for Software services contracts.
Cost of revenue
Cost of revenue primarily includes media and related costs, which consist of the cost to acquire traffic through the purchase of impressions, clicks or actions from publishers or third-party intermediaries, such as advertising exchanges, and technology costs that enable media acquisition. These media costs are used primarily to drive user traffic to the Company’s and its clients’ media properties. Cost of revenue additionally consists of indirect costs such as data verification, hosting and fulfillment costs. Cost of revenue is presented exclusive of depreciation and amortization expenses, as well as salaries and related costs.
Cash and cash equivalents
The Company considers highly liquid securities and other investments purchased with an original or remaining maturity of three months or less at the date of the purchase to be cash equivalents. The Company’s cash is primarily held as cash deposits with no cash restrictions at retail and commercial banks.
Accounts receivable, net
Accounts receivables are recorded net of the allowance for doubtful accounts. Management determines the allowance for doubtful accounts based on factors including past write-offs and delinquency trends and current credit conditions. Accounts are written off when management determines that collection is unlikely. As of March 31, 2021 and 2020, the allowance for doubtful accounts was $3.5 million and $3.1 million, respectively, and bad debts expense was $0.4 million and $0.1 million for the three months ended March 31, 2021 and 2020, respectively.
Property and equipment, net
Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Property and equipment consist of computer and office equipment, furniture and fixtures and leasehold improvements, which are depreciated on a straight-line basis over the estimated useful lives of the assets.
Management regularly assesses the carrying value of its long-lived assets to be held and used, including property and equipment, for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. If such events or circumstances are present, a loss is recognized to the extent the carrying value of the asset is in excess of estimated fair value.
Software development costs
Costs for software developed for internal use are capitalized as Property and equipment on the Consolidated Balance Sheets during the preliminary stage and post-implementation stages and any initial research and development and maintenance costs are expensed as incurred. Costs incurred in the application development stage are capitalized when the internal use software is placed in service, and amortized over the estimated economic life of the software from the date of implementation.
The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including estimated economic life. Capitalized software development costs are amortized on a straight line basis over 3 years, an estimated useful life.
Goodwill and other intangible assets
As of the acquisition date, the Company measures and recognizes goodwill as the excess of: (a) the aggregate of the fair value of consideration transferred, the fair value of any non-controlling interest in the acquiree (if any), and the acquisition date fair value of the Company’s previously held equity interest in the acquiree (if any), over (b) the fair value of net assets acquired and liabilities assumed. Goodwill acquired in Business Combinations is assigned to the reporting unit that is expected to benefit from the combination as of the acquisition date.
On an annual basis, the Company performs a qualitative assessment of goodwill to determine whether it is necessary to perform a quantitative impairment test or more frequently upon the occurrence of certain triggering events or substantive changes in circumstances. The Company is only required to perform the annual quantitative goodwill impairment test if it is concluded that it is more likely than not that a reporting unit’s fair value is less than its carrying amount.
Finite-lived intangible assets primarily consist of software with related technology, customer relationships, non-competition agreements and brand. These assets are initially capitalized based on fair value, acquisition cost, and fair value, if acquired as part of a business combination. The related costs are subsequently amortized on a straight-line basis over the estimated useful lives of the assets.
The Company tests intangible assets with finite useful lives for impairment when a triggering event occurs, or circumstances change indicating that the fair value of the entity may be below its carrying amount. If no triggering event occurs, further impairment testing is not necessary.
Contingencies
The Company is subject to legal, regulatory and other proceedings and claims that arise in the ordinary course of business. An estimated liability is recorded for those proceedings and claims when the loss from such proceedings and claims becomes probable and reasonably estimable. Outstanding claims are reviewed with internal and external counsel to assess the probability and the estimates of loss, including the possible range of an estimated loss. The risk of loss is reassessed each period and as new information becomes available and liabilities are adjusted as appropriate. The actual cost of resolving a claim may be substantially different from the amount of the liability recorded. Differences between the estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on the consolidated financial position but could possibly be material to the consolidated results of operations or cash flows for any one period.
Business combinations
Under the acquisition method of accounting, the Company recognizes, separately from goodwill, the identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.
The Company performs valuations of assets acquired and liabilities assumed and allocates the purchase price to its respective assets and liabilities. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, and selection of comparable companies. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. As a result, actual results may differ from these estimates. During the measurement period, the Company may record adjustments to acquired assets and assumed liabilities, with corresponding offsets to goodwill. Upon the conclusion of a measurement period, any subsequent adjustments are recorded to earnings.
At the acquisition date, the Company measures the fair values of all assets acquired and liabilities assumed that arise from contractual contingencies. The Company also measures the fair values of all non-contractual contingencies if, as of the acquisition date, it is more likely than not that the contingency will give rise to an asset or a liability.
Acquisition related costs not considered part of the consideration are expensed as incurred.
Contingent consideration
The Company recognizes the fair value of any contingent consideration that is transferred to the seller in a business combination on the date at which control of the acquiree is obtained. Contingent consideration is classified as a liability or as equity on the basis of the definitions of an equity instrument and a financial liability. If the contingent consideration is payable in cash, the Company classifies its contingent consideration as a liability. Contingent consideration payments related to acquisitions are measured at fair value at each reporting period using Level 3 unobservable inputs. The Company’s estimates of fair value are based upon projected cash flow, estimated volatility and other inputs but which are uncertain and involve significant judgments by management. Any changes in the fair value of these contingent consideration payments are included in income from operations in the consolidated statements of operations.
Fair value measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In most cases, the exit price and transaction (or entry) price will be the same at initial recognition. In this case, the fair value of financial instruments approximate fair value.
The fair value hierarchy uses a framework which requires categorizing assets and liabilities into one of three levels based on the inputs used in valuing the asset or liability.
• Level 1 inputs are unadjusted, quoted market prices in active markets for identical assets or liabilities.
• Level 2 inputs are observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
• Level 3 inputs include unobservable inputs that are supported by little, infrequent or no market activity and reflect management’s own assumptions about inputs used in pricing the asset or liability.
Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Warrants
The Private Placement Warrants meet the definition of a derivative under ASC 815. The Private Placement Warrants are recorded as liabilities on the balance sheet at fair value, with subsequent changes in their respective fair values recognized in the consolidated statement of earnings (loss) and consolidated statements of comprehensive income (loss) at each reporting date. The Private Placement Warrants are valued using a Black-Scholes-Merton option pricing model using a combination of the historical share price volatility of the Company’s and other similar companies’ share prices and the implied volatility of the public warrants, market price and exercise price and the remaining life of the Private Placement Warrants.
Advertising costs
All advertising, promotional and marketing costs are expensed when incurred. Advertising, promotional and marketing costs for the three months ended March 31, 2021 and 2020 were $0.2 million and $0.5 million, respectively.
Stock-based compensation
Stock-based compensation is measured using the grant-date fair value of the award of equity instruments, including stock options and restricted stock units (“RSUs”). The expense is recognized over the requisite service period and forfeitures are recognized as incurred.
The fair value of options granted to employees is estimated on the grant date using the Black-Scholes-Merton option valuation model. This valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation, including the expected term (weighted-average period of time that the options granted are expected to be outstanding), the expected volatility in the fair market value of the Company’s common stock, a risk-free interest rate and expected dividends. The Company uses the simplified calculation of expected life as the contractual term for options of 10 years is longer than the Company has been publicly traded. The Company does not have enough historical perspective to estimate its volatility of its publicly traded shares or units. The Company’s common stock began trading on April 20, 2018; no cash dividends have been declared since that time, and we do not anticipate paying cash dividends in the foreseeable future. Expected volatility is based on an average of the historical volatilities of the common stock of several entities with characteristics similar to those of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The Company uses the straight-line method for expense attribution.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change.
The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return, which are subject to examination by federal and state taxing authorities. The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based on technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties. The Company recognizes penalties and interest related to uncertain tax positions within the provision (benefit) for income taxes line in the accompanying consolidated statements of operations.
DMSH, the Company’s accounting predecessor, is a limited liability company treated as a partnership for U.S. federal income tax purposes and is not subject to entity-level U.S. federal income tax, except with respect to UE, which was acquired in November 2019. Because UE is treated as a corporation for U.S. federal income tax purposes, it is subject to entity-level U.S. federal income tax. As a result of the Business Combination, Blocker’s allocable share of earnings from DMSH are also subject to U.S. federal and state and local income taxes.
Tax Receivable Agreement
In conjunction with the Business Combination, DMS Inc. and Blocker also entered into the Tax Receivable Agreement with the Sellers. Pursuant to the Tax Receivable Agreement, DMS Inc. is required to pay the Sellers (i) 85% of the amount of savings, if any, in U.S. federal, state and local income tax that DMS Inc. and Blocker actually realize as a result of (A) certain existing tax attributes of Blocker acquired in the Business Combination, and (B) increases in Blocker’s allocable share of the tax basis of the assets of DMS and certain other tax benefits related to the payment of the cash consideration pursuant to the Business Combination Agreement and any redemptions or exchanges of DMS Units for cash or Class A Common Stock after the Business Combination and (ii) 100% of certain refunds of pre-Closing taxes of DMSH and Blocker received during a taxable year beginning within two (2) years after the Closing. All such payments to the Sellers are the obligation of DMS Inc., and not that of DMSH. As a result of the Business Combination, the Company recorded a deferred tax asset and income tax receivable of $20.1 million and $199 thousand, respectively, with the offset as a long-term Tax Receivable Agreement liability of $16.3 million and Additional Paid-in Capital of $4.0 million in the consolidated balance sheet.
As of March 31, 2021, the total amount of liability under the Tax Receivable Agreement was $16.3 million, of which $0.5 million was current and included in Accrued expenses and other current liabilities on the consolidated balance sheet.
Earnings per share
Basic earnings per share of Class A common stock is computed by dividing net income attributable to DMS Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income attributable to DMS Inc., adjusted for the assumed exchange of all potentially dilutive securities, by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive elements.
Prior to the Business Combination, the membership structure of DMSH included units which had profit interests. The Company analyzed the calculation of earnings per unit for periods prior to the Business Combination and determined that it resulted in values that would not be meaningful to the users of these consolidated financial statements. Therefore, earnings per share information has not been presented for January 1, 2020 through July 15, 2020, the Business Combination date.
New Accounting Standards
Accounting Standards Recently Adopted
In January 2020, the Company adopted FASB ASU 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.
Accounting Standards Not Yet Adopted
The Company qualifies as an “emerging growth company” and thus, has elected to adhere to the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This election allows the Company to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.
In March 2020, the Financial Accounting Standards Board (“FASB”) issued guidance related to reference rate reform, which provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions that reference LIBOR and are affected by reference rate reform. The Company adopted the standard effective March 31, 2020 and elected the expedient to prospectively adjust the effective interest rate when LIBOR is replaced. We do not expect this standard to have a material impact on the Company’s consolidated financial statements.
Accounting Standards Not Yet Adopted
In February 2016, the FASB issued authoritative guidanceASC 842, Lease Accounting, regarding the accounting for leases, and has since issued subsequent updates to the initial guidance. The amended guidance requires the recognition of assets and liabilities for operating leases. The standard was initially effective for annual and interim reporting periods beginning after December 15, 2019. However, in November 2019, the FASB issued amended guidance, which defers for Emerging Growth Companies (“EGC”) the effective date for fiscal years beginning after December 15, 2020, including2021, and interim periods within those annual periods.fiscal years beginning after December 15, 2022. The standard must be adopted using a modified retrospective transition. We plan to elect the followingpackage of practical expedients: (1)expedients permitted under the transition guidance of the new standards, which allows us to not reassess whether any expired or existing contracts contain leases, allows us to reassess our prior conclusions regarding lease identification,carry forward the historical lease classification
and permits us to exclude from our assessment initial direct costs; and (2) the short term practical expedientcosts for any existing leases. We will also make an accounting policy election to exclude leases with an initial term of 12twelve months or less from our transition adjustment. We are currently evaluating the impact on our consolidated balance sheets, recognizing assets and not recognize right-of-use assets orrelated lease liabilities, for those leases. The Company is currently evaluating all the impacts of adopting the new standard and expects the adoption of this standard towhich may or may not have a material impact on the Company’s consolidated balance sheet and related disclosures.Consolidated Financial Statements.
In August 2018, the FASB issued authoritative guidance regarding customer's accounting for implementation costs incurred in a cloud computing arrangement (“CCA”) that is a service contract. These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). We plan to address which costs should be capitalized, including the cost to acquire the license and the related implementation costs. When we evaluate potential capitalization costs, we will consider external direct costs of materials, third-party service fees to develop the software, costs to obtain software from third-parties, and coding and testing fees directly related to software product. We are permitted to apply either a retrospective or prospective transition approach to adopt this guidance. If the prospective transition is chosen, we will apply the transition requirements to eligible costs incurred after adoption. The guidance is effective for fiscalannual periods beginning after December 15, 2020.in 2021 and interim periods in 2022. We are currently evaluating the potential impact on our consolidated financial statements.
In June 2016, the FASB issued authoritative guidance on accounting for credit losses on financial instruments, including trade receivables, and has since issued subsequent updates to the initial guidance. The amended guidance requires the application of a current expected credit loss model, which measures credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts. The guidance requires adoption using a modified retrospective approach and wasis effective for annual periods beginning after December 15, 2019. However, in November 2019, the FASB issued amended guidance, which defers the effective date forEGC fiscal years beginning after December 15, 2020,2022, including interim periods within those annual periods.fiscal years. We are currently evaluating the potential impact on our consolidated financial statements, including our disclosures.statements.
NOTE 2. BUSINESS COMBINATION
On July 15, 2020, DMSH consummated the business combinationBusiness Combination with Leo pursuant to the Business Combination Agreement (the “Busines“Business Combination Agreement”), by and among Leo, DMSH, Blocker, Prism Data, LLC, a Delaware limited liability company (“Prism”), CEP V-A DMS AIV Limited Partnership, a Delaware limited partnership (“Clairvest Direct Seller”) and related entities (the “Sellers”).
In connection with the consummation of the Business Combination, the following occurred:
•Leo was domesticated and continues as a Delaware corporation, changing its name to “Digital Media Solutions, Inc.”
•The Company was organized into an umbrella partnership-C corporation (or “Up-C”) structure, in which substantially all of the assets and business of the Company are held by DMSH and continue to operate through the subsidiaries of DMSH, and the Company’s sole material assets are the equity interests of DMSH indirectly held by it.
•DMS Inc. consummated the PIPE investment with certain qualified institutional buyers and accredited investors (the “PIPE Investors”), pursuant to which the PIPE Investors collectively subscribed for 10,424,282 shares of Class A Common Stock for an aggregate purchase price of $100.0 million.
•DMS Inc. purchased all of the issued and outstanding common stock of Blocker and a portion of the units of DMSH held by Prism and Clairvest Direct Seller. Those DMSH membership interests were then immediately contributed to the capital of Blocker in exchange for aggregate consideration to the Sellers of $57.3 million in cash, 25,857,070 shares of Class B common stock, 2.0 million warrants to purchase Class A Common Stock, and 17,937,954 shares of Class C common stock. Refer to Note 9.10. Equity for a description of the Company’s common stock.
•The Sellers amended and restated the limited liability company agreement of DMSH (the “Amended Partnership Agreement”), to, among other things: (i) recapitalize DMSH such that, as of immediately following the consummation of the Business Combination, Prism and Clairvest Direct Seller collectively own 25,857,070 of DMSH Units and Blocker owns 32,293,793 of DMSH Units; and (ii) provide Clairvest Direct Seller and Prism the right to redeem their DMSH Units for cash or, at the Company’s option, the Company may acquire the DMSH Units in exchange for cash or shares of Class A Common Stock, subject to certain restrictions set forth therein.
•DMS Inc. issued 2.0 million warrants in exchange for previously held warrants in Leo, and an additional approximate 10.0 million warrants were issued in exchange for the warrants offered and sold by Leo in its initial public offering.offering. Refer to Note 9.10. Equity for a description of the Company’s warrants.
•DMS Inc. obtained $30.0 million in cash for working capital needs and $10.0 million to pay down outstanding indebtedness under the Monroe Facility.Capital Management Advisors Credit Agreement (as administrative agent and lender) (the “Monroe Facility”).
•The Sellers exercised their right to convert the shares of Class C Common Stock into shares of Class A Common Stock, on a 1-for-one basis, in accordance with the new Certificate of Incorporation (the “Conversion”).
•Prism and Clairvest Direct Seller continue to retain a significant continuing equity interest in the Company, representing 44% of the economic interests in DMSH and 44% of the voting interest in DMS Inc. (“non-controlling interest”).
•On October 22, 2020, as required by the post-closing working capital adjustment provisions of the Business Combination Agreement, (i) the Company issued (a) 98,783 total additional shares of Class A Common Stock to the Blocker Sellers and (b) 142,394 total additional shares of Class B Common Stock to Prism and Clairvest Direct Seller.
•In conjunction with the Business Combination, DMS Inc. and Blocker also entered into a tax receivable agreement (the “TRA”)Tax Receivable Agreement with the Sellers. Pursuant to the TRA,Tax Receivable Agreement, DMS Inc. is required to pay the Sellers (i) 85% of the amount of savings, if any, in U.S. federal, state and local income tax that DMS Inc. and Blocker actually realize as a result of (A) certain existing tax attributes of Blocker acquired in the Business Combination, and (B) increases in Blocker’s allocable share of the tax basis of the assets of DMS and certain other tax benefits related to the payment of the cash consideration pursuant to the Business Combination Agreement and any redemptions or exchanges of DMS Units for cash or Class A Common Stock after the Business Combination and (ii) 100% of certain refunds of pre-Closing taxes of DMSH and Blocker received during a taxable year beginning within two (2) years after the Closing. All such payments to the Sellers are the obligation of DMS Inc., and not that of DMSH. As a result of this agreement, the Company recorded a Deferreddeferred tax asset and income tax receivable of $18.4$20.1 million and $199 thousand, respectively, with the offset as a Long-term TRAlong-term Tax Receivable Agreement liability of $15.7$16.3 million and Additional Paid-in Capital of $2.8$4.0 million in the unaudited condensed consolidated balance sheets.
At September 30,December 31, 2020, there were (i) 32,293,79332,392,576 shares of Class A Common Stock outstanding, (ii) 25,857,07025,999,464 shares of Class B Common Stock outstanding, (iii) 0 shares of Class C Common Stock outstanding and (iv) 13,999,998 warrants to purchase Class A Common Stock outstanding.
In conjunction with the Business Combination, we incurred approximately $2.4 million of transaction expenses related to incentive bonuses and other acquisition related expenses, which were recorded as Acquisitions Costs inat the unaudited condensed consolidated statementstime of operations during the three and nine months ended September 30, 2020.Business Combination.
NOTE 3. REVENUE
The Company derives revenue primarily through the delivery of various types of services, including: customer acquisition, managed services and software as a service (“SaaS”). The Company recognizes revenue when the promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. The Company has elected the practical expedient to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized in the amount to which the Company has the right to invoice for services performed.
The Company has organized its operations into 3 reportable segments: Brand Direct, Marketplace and Other. The Brand Direct reportable segment consists of services delivered against our customer’s brand,customers’ brands, while the Marketplace reportable segment includes services delivered directly against the DMS brand. In the Other reportable segment, services offered by the Company include software services and digital media services that are managed on behalf of the customer. Corporate and other represents other business activities and includes eliminating entries. Management uses these segments to evaluate the performance of its businesses and to assess its financial results and forecasts.
Disaggregation of Revenue
The following tables presents the disaggregation of revenue by reportable segment and type of service (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Brand
Direct | | Marketplace | | Other | | Corporate
and other | | Total |
| Three Months Ended September 30, 2020 | | | | | | | | | |
| Net revenue: | | | | | | | | | |
| Customer acquisition | $ | 43,921 | | | $ | 39,541 | | | $ | 0 | | | $ | (8,755) | | | $ | 74,707 | |
| Managed services | 5,247 | | | 0 | | | 2,045 | | | 0 | | | 7,292 | |
| Software services | 0 | | | 0 | | | 830 | | | 0 | | | 830 | |
| Total Net revenue | $ | 49,168 | | | $ | 39,541 | | | $ | 2,875 | | | $ | (8,755) | | | $ | 82,829 | |
| Three Months Ended September 30, 2019 | | | | | | | | | |
| Net revenue: | | | | | | | | | |
| Customer acquisition | $ | 41,330 | | | $ | 15,542 | | | $ | 0 | | | $ | (3,796) | | | $ | 53,076 | |
| Managed services | 3,147 | | | 0 | | | 562 | | | 0 | | | 3,709 | |
| Software services | 0 | | | 0 | | | 790 | | | 0 | | | 790 | |
| Total Net revenue | $ | 44,477 | | | $ | 15,542 | | | $ | 1,352 | | | $ | (3,796) | | | $ | 57,575 | |
| | | Brand
Direct | | Marketplace | | Other | | Corporate
and other | | Total | | Brand
Direct | | Marketplace | | Other | | Corporate
and other | | Total |
| Nine Months Ended September 30, 2020 | | | | | | | | | | |
| Three Months Ended March 31, 2021 | | Three Months Ended March 31, 2021 | | | | | | | | | |
| Net revenue: | Net revenue: | | Net revenue: | |
| Customer acquisition | Customer acquisition | $ | 122,557 | | | $ | 108,937 | | | $ | 0 | | | $ | (19,001) | | | $ | 212,493 | | Customer acquisition | $ | 52,901 | | | $ | 49,101 | | | $ | 0 | | | $ | (10,652) | | | $ | 91,350 | |
| Managed services | Managed services | 12,885 | | | 0 | | | 2,945 | | | 0 | | | 15,830 | | Managed services | 3,278 | | | 158 | | | 510 | | | 0 | | | 3,946 | |
| Software services | Software services | 0 | | | 0 | | | 2,430 | | | 0 | | | 2,430 | | Software services | 0 | | | 0 | | | 1,507 | | | 0 | | | 1,507 | |
| Total Net revenue | Total Net revenue | $ | 135,442 | | | $ | 108,937 | | | $ | 5,375 | | | $ | (19,001) | | | $ | 230,753 | | Total Net revenue | $ | 56,179 | | | $ | 49,259 | | | $ | 2,017 | | | $ | (10,652) | | | $ | 96,803 | |
| Nine Months Ended September 30, 2019 | | | | | | | | | | |
| Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2020 | | | | | | | | | |
| Net revenue: | Net revenue: | | Net revenue: | |
| Customer acquisition | Customer acquisition | $ | 124,173 | | | $ | 47,116 | | | $ | 0 | | | $ | (12,517) | | | $ | 158,772 | | Customer acquisition | $ | 38,453 | | | $ | 34,178 | | | $ | 0 | | | $ | (3,610) | | | $ | 69,021 | |
| Managed services | Managed services | 10,054 | | | 0 | | | 1,973 | | | 0 | | | 12,027 | | Managed services | 2,448 | | | 0 | | | 450 | | | 0 | | | 2,898 | |
| Software services | Software services | 0 | | | 0 | | | 2,343 | | | 0 | | | 2,343 | | Software services | 0 | | | 0 | | | 809 | | | 0 | | | 809 | |
| Total Net revenue | Total Net revenue | $ | 134,227 | | | $ | 47,116 | | | $ | 4,316 | | | $ | (12,517) | | | $ | 173,142 | | Total Net revenue | $ | 40,901 | | | $ | 34,178 | | | $ | 1,259 | | | $ | (3,610) | | | $ | 72,728 | |
Contract balances
The Company’s contract liabilities result from payments received in advance of revenue recognition received from clients, which precede the Company’s satisfaction of the associated performance obligation. If a customer pays consideration before the Company’s performance obligations are satisfied, such amounts are classified as deferred revenue on the consolidated balance sheets. As of September 30, 2020March 31, 2021 and December 31, 2019,2020, the balance of deferred revenue was $0.4$1.1 million and $1.2$1.7 million, respectively, and recorded within Accrued expenses and other current liabilities on the unaudited condensed consolidated balance sheets. During the nine months ended September 30, 2020 and 2019, we recognized revenue of $1.2 million and $1.3 million, respectively, related to deferred revenue recorded at December 31, 2019 and 2018, respectively. We expect the majority of the deferred revenue balance at September 30, 2020March 31, 2021 to be recognized as revenue during the fourthsecond quarter of 2020.2021.
When there is a delay between the completion of our performance obligations and when a customer is invoiced, revenue is recognized and recorded as unbilled revenue (i.e. contract assets) within Accounts receivable, net on the unaudited condensed consolidated balance sheets. As of September 30, 2020March 31, 2021 and December 31, 2019,2020, unbilled revenue included in accounts receivable was $2.0$2.5 million and $0.8$1.8 million, respectively. In line with industry practice, the Company applies the constraint on variable consideration and records revenue based on internally tracked conversions (leads delivered), net of the amount tracked and subsequently confirmed by customers. Substantially all amounts included within the unbilled revenue balance are invoiced to customers within the month directly following the period of service. Historical estimates related to unbilled revenue have not been materially different from actual revenue billed.
NOTE 4. REPORTABLE SEGMENTS
The Company’s operating segments are determined based on the financial information reviewed by its chief operating decision maker (“CODM”), and the basis upon which management makes resource allocation decisions and assesses the performance of the Company’s segments. The Company evaluates the operating performance of its segments based on financial measures such as net revenue, cost of revenue, and gross profit. Given the nature of the digital marketing solutions business, the amount of assets does not provide meaningful insight into the operating performance of the Company. As a result, the amount of the Company’s assets is not subject to segment allocation and total assets is not included within the disclosure of the Company’s segment financial information.
The following tables are a reconciliation of the operations of our segments to income from operations (in thousands):
| | | Three Months Ended September 30, 2020 | | Three Months Ended March 31, 2021 |
| | Brand
Direct | | Marketplace | | Other | | Corporate
and Other | | Total | | Brand
Direct | | Marketplace | | Other | | Corporate
and Other | | Total |
| Net revenue | Net revenue | $ | 49,168 | | | $ | 39,541 | | | $ | 2,875 | | | $ | (8,755) | | | $ | 82,829 | | Net revenue | $ | 56,179 | | | $ | 49,259 | | | $ | 2,017 | | | $ | (10,652) | | | $ | 96,803 | |
| Cost of revenue | Cost of revenue | 37,828 | | | 27,661 | | | 1,043 | | | (8,755) | | | 57,777 | | Cost of revenue | 41,061 | | | 36,599 | | | 416 | | | (8,894) | | | 69,182 | |
| Gross profit | Gross profit | $ | 11,340 | | | $ | 11,880 | | | $ | 1,832 | | | $ | 0 | | | $ | 25,052 | | Gross profit | $ | 15,118 | | | $ | 12,660 | | | $ | 1,601 | | | $ | (1,758) | | | $ | 27,621 | |
| Salaries and related costs | Salaries and related costs | | 7,882 | | Salaries and related costs | | 10,269 | |
| General and administrative expenses | General and administrative expenses | | 6,407 | | General and administrative expenses | | 6,962 | |
| Acquisition costs | Acquisition costs | | 3,248 | | Acquisition costs | | 1,494 | |
| Depreciation and amortization | Depreciation and amortization | | 4,636 | | Depreciation and amortization | | 5,419 | |
| Income from operations | Income from operations | | $ | 2,879 | | Income from operations | | $ | 3,477 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Brand
Direct | | Marketplace | | Other | | Corporate
and Other | | Total |
| Net revenue | $ | 44,477 | | | $ | 15,542 | | | $ | 1,352 | | | $ | (3,796) | | | $ | 57,575 | |
| Cost of revenue | 33,499 | | | 9,366 | | | 32 | | | (3,796) | | | 39,101 | |
| Gross profit | $ | 10,978 | | | $ | 6,176 | | | $ | 1,320 | | | $ | 0 | | | $ | 18,474 | |
| Salaries and related costs | | | | | | | | | 6,599 | |
| General and administrative expenses | | | | | | | | | 4,479 | |
| Acquisition costs | | | | | | | | | 11,707 | |
| Depreciation and amortization | | | | | | | | | 2,201 | |
| Loss from operations | | | | | | | | | $ | (6,512) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Brand
Direct | | Marketplace | | Other | | Corporate
and Other | | Total |
| Net revenue | $ | 135,442 | | | $ | 108,937 | | | $ | 5,375 | | | $ | (19,001) | | | $ | 230,753 | |
| Cost of revenue | 103,125 | | | 75,101 | | | 1,113 | | | (19,001) | | | 160,338 | |
| Gross profit | $ | 32,317 | | | $ | 33,836 | | | $ | 4,262 | | | $ | 0 | | | $ | 70,415 | |
| Salaries and related costs | | | | | | | | | 24,114 | |
| General and administrative expenses | | | | | | | | | 16,356 | |
| Acquisition costs | | | | | | | | | 3,322 | |
| Depreciation and amortization | | | | | | | | | 13,307 | |
| Income from operations | | | | | | | | | $ | 13,316 | |
| | | Nine Months Ended September 30, 2019 | | Three Months Ended March 31, 2020 |
| | Brand
Direct | | Marketplace | | Other | | Corporate
and Other | | Total | | Brand
Direct | | Marketplace | | Other | | Corporate
and Other | | Total |
| Net revenue | Net revenue | $ | 134,227 | | | $ | 47,116 | | | $ | 4,316 | | | $ | (12,517) | | | $ | 173,142 | | Net revenue | $ | 40,901 | | | $ | 34,178 | | | $ | 1,259 | | | $ | (3,610) | | | $ | 72,728 | |
| Cost of revenue | Cost of revenue | 100,171 | | | 29,345 | | | 85 | | | (12,517) | | | 117,084 | | Cost of revenue | 30,888 | | | 22,899 | | | 31 | | | (3,659) | | | 50,159 | |
| Gross profit | Gross profit | $ | 34,056 | | | $ | 17,771 | | | $ | 4,231 | | | $ | 0 | | | $ | 56,058 | | Gross profit | $ | 10,013 | | | $ | 11,279 | | | $ | 1,228 | | | $ | 49 | | | $ | 22,569 | |
| Salaries and related costs | Salaries and related costs | | 20,495 | | Salaries and related costs | | 8,331 | |
| General and administrative expenses | General and administrative expenses | | 13,514 | | General and administrative expenses | | 5,297 | |
| Acquisition costs | Acquisition costs | | 17,492 | | Acquisition costs | | 27 | |
| Depreciation and amortization | Depreciation and amortization | | 6,165 | | Depreciation and amortization | | 4,315 | |
| Loss from operations | Loss from operations | | $ | (1,608) | | Loss from operations | | $ | 4,599 | |
NOTE 5. PROPERTY AND EQUIPMENT
The following table presents major classifications of property and equipment and the related useful lives (in thousands, except useful lives):
| | | | | | | | | | | | | | | | | | | | |
| | | | |
| | Useful Lives | | March 31, 2021 | | December 31, 2020 |
| Computers and office equipment | | 3 | | $ | 2,010 | | | $ | 1,684 | |
| Furniture and fixtures | | 5 | | $ | 905 | | | $ | 305 | |
| Leasehold improvements | | 7 | | $ | 692 | | | $ | 320 | |
| Software development costs | | 3 | | $ | 20,774 | | | $ | 18,913 | |
| Total | | | | $ | 24,381 | | | $ | 21,222 | |
| Less: Accumulated depreciation and amortization | | | | $ | (7,853) | | | $ | (6,206) | |
| Property and equipment, net | | | | $ | 16,528 | | | $ | 15,016 | |
Depreciation and amortization expense for property and equipment for the period ended March 31, 2021 and 2020 was $0.1 million and $0.1 million, respectively, included in our consolidated statements of operations.
As of March 31, 2021 and December 31, 2020, the unamortized balance of capitalized software development costs was $14.7 million and $14.0 million, respectively. Amortization of capitalized software development costs for the quarters ended March 31, 2021 and 2020 was $1.0 million and $0.7 million, respectively, included in depreciation and amortization of our consolidated statements of operations.
NOTE 5.6. GOODWILL AND INTANGIBLE ASSETS
Goodwill
Changes in the carrying value of goodwill, by reporting segment, were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Brand
Direct | | Marketplace | | Other | | Total |
| Balance, December 31, 2019 | $ | 8,616 | | | $ | 32,660 | | | $ | 550 | | | $ | 41,826 | |
| Additions (Note 7) | 0 | | | 0 | | | 2,542 | | | 2,542 | |
| Balance, September 30, 2020 | $ | 8,616 | | | $ | 32,660 | | | $ | 3,092 | | | $ | 44,368 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Brand
Direct | | Marketplace | | Other | | Total |
| Balance, December 31, 2020 | $ | 8,616 | | | $ | 32,660 | | | $ | 3,628 | | | $ | 44,904 | |
| Additions (Note 8) | 4,853 | | | 0 | | | 0 | | | 4,853 | |
| Balance, March 31, 2021 | $ | 13,469 | | | $ | 32,660 | | | $ | 3,628 | | | $ | 49,757 | |
The carrying amount of goodwill for all reporting units had 0 accumulated impairments as of September 30, 2020March 31, 2021 and December 31, 2019.
Intangible assets, net
Finite-lived intangible assets consisted of the following (in thousands):
| | | September 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| | Amortization
Period (Years) | | Gross | | Accumulated
Amortization | | Net | | Gross | | Accumulated
Amortization | | Net | | Amortization
Period (Years) | | Gross | | Accumulated
Amortization | | Net | | Gross | | Accumulated
Amortization | | Net |
| Intangible assets subject to amortization: | Intangible assets subject to amortization: | | | | | | | | | | | | | | Intangible assets subject to amortization: | | | | | | | | | | | | | |
| Technology | Technology | 3 to 5 | | $ | 47,946 | | | $ | (17,827) | | | $ | 30,119 | | | $ | 47,946 | | | $ | (9,751) | | | $ | 38,195 | | Technology | 3 to 5 | | $ | 58,508 | | | $ | (22,795) | | | $ | 35,713 | | | $ | 48,008 | | | $ | (21,454) | | | $ | 26,554 | |
| Customer relationships | Customer relationships | 1 to 12 | | 22,383 | | | (5,127) | | | 17,256 | | | 19,583 | | | (3,078) | | | 16,505 | | Customer relationships | 1 to 12 | | 28,092 | | | (7,621) | | | 20,471 | | | 21,794 | | | (6,749) | | | 15,045 | |
| Brand | Brand | 1 to 5 | | 4,459 | | | (2,571) | | | 1,888 | | | 4,187 | | | (2,556) | | | 1,631 | | Brand | 1 to 5 | | 4,521 | | | (1,174) | | | 3,347 | | | 4,295 | | | (961) | | | 3,334 | |
| Non-competition agreements | Non-competition agreements | 3 | | 1,815 | | | (803) | | | 1,012 | | | 1,815 | | | (211) | | | 1,604 | | Non-competition agreements | 3 | | 2,222 | | | (724) | | | 1,498 | | | 2,105 | | | (591) | | | 1,514 | |
| Total | Total | | $ | 76,603 | | | $ | (26,328) | | | $ | 50,275 | | | $ | 73,531 | | | $ | (15,596) | | | $ | 57,935 | | Total | | $ | 93,343 | | | $ | (32,314) | | | $ | 61,029 | | | $ | 76,202 | | | $ | (29,755) | | | $ | 46,447 | |
Amortization expense for finite-lived intangible assets is recorded on a straight-line basis in the pattern in which the assets’ economic benefits are consumed over their estimated useful lives. Amortization expense related to finite-lived intangible assets was $10.7$4.1 million and $5.0$3.5 million for the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, respectively.
Impairment analysis
For the nine months ended September 30, 2020, there were no events or changes in circumstances to indicate that goodwill or intangible assets are impaired.
NOTE 6.7. DEBT
The following table presents the components of outstanding debt (in thousands):
| | | September 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| Term loan | Term loan | $ | 191,514 | | | $ | 194,810 | | Term loan | $ | 189,546 | | | $ | 190,541 | |
| Revolving credit facility | Revolving credit facility | 4,000 | | | 5,000 | | Revolving credit facility | 4,000 | | | 4,000 | |
| Delayed draw term loan | Delayed draw term loan | 8,301 | | | 8,429 | | Delayed draw term loan | 8,194 | | | 8,236 | |
| Notes payable - insurance premium | | Notes payable - insurance premium | 247 | | | 1,074 | |
| Total debt | Total debt | 203,815 | | | 208,239 | | Total debt | 201,987 | | | 203,851 | |
| Unamortized debt issuance costs | Unamortized debt issuance costs | (2,606) | | | (3,041) | | Unamortized debt issuance costs | (2,060) | | | (2,293) | |
| Debt, net | Debt, net | 201,209 | | | 205,198 | | Debt, net | 199,927 | | | 201,558 | |
| Current portion of long-term debt | Current portion of long-term debt | (4,150) | | | (4,150) | | Current portion of long-term debt | (7,141) | | | (7,967) | |
| Long-term debt | Long-term debt | $ | 197,059 | | | $ | 201,048 | | Long-term debt | $ | 192,786 | | | $ | 193,591 | |
On July 3, 2018, DMSH entered into a Credit Agreement with Monroe Capital Management Advisors (as administrative agent and lender) (the “Monroe Facility”). The Monroe Facility matures in July 2023 and bears interest at a variable rate equal to the three-month LIBOR, or an alternate base rate, plus an agreed upon margin with the lender. The Monroe Facility also contains covenants that require the Company to meet certain financial ratios and places restrictions on the payment of dividends, sale of assets, borrowing level, mergers, and purchases of capital stock, assets, and investments.
During the year ended December 31, 2019 the Monroe Facility’s capacity was amended to increase the term loan by $99.0 million for a total term commitment of $199.0 million, and this amendment also increased capacity on the revolver by an additional $2.5 million, for a total amended capacity of $221.5 million, which had an effective interest rate of 6.8% for the year ended December 31, 2019. The Company used the funds to finance a portion of the acquisition of UE, accelerate contingent consideration payments, and to add to general working capital. Refer to Note 7. Acquisitions, for a more detailed discussion on the acquisition of UE.
On January 7, 2020, the Monroe Facility was amended to increase the revolver commitment to $15.0 million.million with an additional payment of $1.5 million incremental issuance cost.
On August 26, 2020, we amended the Monroe Facility to, among other things, (i) modify the covenant calculation of EBITDA to include certain transaction expenses incurred in connection with the Business Combination and (ii) exclude certain accounts from the SmarterChaos acquisition.
As of March 31, 2021, we had approximately $212.7 million total outstanding capacity under our Monroe Facility, which had an effective interest rate of 5.2% ly.
The Monroe Facility also contains covenants that require the Company to meet certain financial ratios and places restrictions on the payment of dividends, Cap threshold for holding excess cash, sale of assets, borrowing level, mergers, and purchases of capital stock, assets, and investments.
As of March 31, 2021, the Company was in compliance with its debt covenants under its Credit Agreement with the Monroe Facility.
The Company’s debt with the Monroe Facility is collateralized by subordinated rights to the landlord’s lien on personal property deposit and security accounts, and intellectual properties such as licensed trademarks and copyrights.
Debt Maturity Schedule
The scheduled maturities of our total debt are estimated as follows at March 31, 2021 (in thousands):
| | | | | | | | |
| (in thousands) | | | | |
| 2021 | | | | 7,141 | |
| 2022 | | | | 8,000 | |
| 2023 | | | | 186,846 | |
| 2024 | | | | $ | 0 | |
| 2025 and thereafter | | | | $ | 0 | |
| | | | $ | 201,987 | |
The Company holds a certain cash balance throughout the year depending on its cash flow requirements. When it exceeds a certain level of the Cap threshold, it will trigger additional cash payments under the Monroe Facility. If the Cap threshold is not met, at minimum the Company is expected to make $4.2 million principal payment under the Monroe Facility. The table above presents minimum payments plus additional fees paid attributable to holding excess cash on its balance sheets.As of March 31, 2021, the Company was in compliance with its debt covenants under its Credit Agreement under the Monroe Facility.
NOTE 7.8. ACQUISITIONS
Aimtell, PushPros and Aramis
The Company acquired on February 1, 2021, Aimtell, Inc. (“Aimtell”), PushPros, Inc. (“PushPros”) and Aramis Interactive (“Aramis”). Aimtel and PushPros are leading providers of technology-enabled digital performance advertising solutions connecting consumers and advertisers within home, auto, health and life insurance. Aramis is a network of owned-and-operated websites that leverages the Aimtell and PushPros technologies and relationships.
The Company paid consideration of $25.3 million at the closing transaction, consisting of $5.0 million in cash and approximately 1.29 million shares of Class A Common Stock valued at $15.0 million, subject to a lock-up agreement, contingent consideration with an initial fair value of $4.9 million and working capital of $0.3 million. Total expected payouts for contingent consideration over the next three years is $15.0 million, subject to the acquired companies reaching certain milestones. The contingent consideration can be paid in cash or capital stock at the election of the Company.
In conjunction with this acquisition, we incurred approximately $0.5 million of legal and other acquisition-related expenses, which were recorded as Acquisitions Costs in the unaudited condensed consolidated statements of operations during the three months ended March 31, 2021.
The Company primarily used an Income Approach, specifically a Discounted Cash Flow (“DCF”) analysis, which represents Level 3 fair value measurements, to assess the components of its purchase price allocation. The acquisition was accounted for as a business combination, whereby the excess of the fair value of the business over the fair value of identifiable net assets was allocated to goodwill. The results of operations of the acquired businesses have been included in the Company’s results of operations since the acquisition date of February 1, 2021. Under Accounting Standards Codification 805 (ASC 805), an acquirer must recognize any assets acquired and liabilities assumed at the acquisition date, measured at fair value as of that date. Assets meeting the identification criteria included tangible assets, such as real and personal property, and intangible assets. Identified intangible assets included the brand and customer relationships of the acquired business. The fair value of the brand was determined by applying an Income Approach, specifically the Relief from Royalty Method. The fair value of the acquired customer relationships was determined by applying an Income Approach, specifically the Multi Period Excess Earnings Method.
The following table presents the preliminary fair value allocation of the purchase price to the assets acquired, and liabilities assumed (in thousands):
| | | | | |
| February 1, 2021 |
| Goodwill | 4,853 | |
| |
| Brand | 226 | |
| Non-competition agreements | 117 | |
| Technology | 10,500 | |
| |
| Customer relationships | 7,920 | |
| Other assets acquired | 5,100 | |
| Liabilities assumed | (3,446) | |
| |
| |
| Net assets acquired | $ | 25,270 | |
The goodwill related to this transaction reflects the workforce and synergies expected from combining the operations of Aimtel/Aramis/PushPros and is included in the Brand Direct reportable segment. Intangible assets primarily consist of technology, brand and customer relationships with an estimated useful life of seven years for technology, one to five years for brand, and five to seven years for customer relationships. Accounting remains open for working capital adjustments and final fair value calculations.
Smarterchaos and She is Media
On July 16, 2020, the Company acquired SmarterChaos.com, LLC, a premier digital marketing and online performance management marketer, along with She Is Media, a female-centric performance ad network, (collectively, “SmarterChaos”) for cash and equity of DMSH totaling approximately $5.8 million, net of cash, which is subject to a working capital adjustment. This acquisition expanded media distribution, allowing the Company to further accelerate the digital marketing acquisition efforts of its advertiser clients and enable brands to acquire new customers by leveraging our customer acquisition platform and the relationships cultivated by SmarterChaos.
DMSH issued the SmarterChaos sellers approximately 307 thousand DMSH Units, which are convertible to Class A Common Stock, with an aggregate total value of $3.0 million based on the DMS Inc. stock price on July 15, 2020. The SmarterChaos sellers also became parties to the Amended Partnership Agreement.
In conjunction with this acquisition, we incurred approximately $0.4 million of legal and other acquisition-related expenses, which were recorded as Acquisitions Costs in the unaudited condensed consolidated statements of operations during the three and nine months ended September 30, 2020.operations.
The Company primarily used an Income Approach, specifically a Discounted Cash Flow (“DCF”) analysis, which represents Level 3 fair value measurements, to assess the components of its purchase price allocation. The acquisition was accounted for as a business combination, whereby the excess of the fair value of the business over the fair value of identifiable net assets was allocated to goodwill. The results of operations of the acquired businesses have been included in the Company’s results of operations since the acquisition date of July 16, 2020. Under Accounting Standards Codification 805 (ASC 805), an acquirer must recognize any assets acquired and liabilities assumed at the acquisition date, measured at fair value as of that date. Assets meeting the identification criteria included tangible assets, such as real and personal property, and intangible assets. Identified intangible assets included the brand and customer relationships of the acquired business. The fair value of the brand was determined by applying an Income Approach, specifically the Relief from Royalty Method. The fair value of the acquired customer relationships was determined by applying an Income Approach, specifically the Multi Period Excess Earnings Method. As of September 30, 2020, the purchase accounting measurement period has not been finalized primarily due to the working capital adjustment, open tax contingencies and the valuation of DMSH units and intangibles.
The following table presents the preliminary fair value allocation of the purchase price to the assets acquired, and liabilities assumed (in thousands):
| | | | | |
| July 16, 2020 |
| Goodwill | $ | 2,5423,078 | |
| |
| Brand | 272277 | |
| |
| Customer relationships | 2,8002,500 | |
| Accounts receivable | 833576 | |
| Other assets acquired | 30 | |
| Liabilities assumed | (678)(662) | |
| |
| Net assets acquired | $ | 5,799 | |
The goodwill related to this transaction reflects the workforce and synergies expected from combining the operations of SmarterChaos and is included in the Other reportable segment. Intangible assets primarily consist of brand and customer relationships with an estimated useful life of three and five years, respectively. Accounting remains open for working capital adjustments and final fair value during the measurement period.
NOTE 9. RESTRUCTURING COSTS
Restructuring costs include expenses associated with the Company’s effort to continually improve operational efficiency and reposition its assets to remain competitive on a national basis. Termination of office lease and other related costs include lease and termination of fixed assets, employee training, relocation and facility costs. These costs are recorded in General and administrative expenses, net in the consolidated statements of earnings (loss).
The Company leases certain office locations, including both long-term and short-term leases, with several leases offering renewal options. Rent expense for the three months ended March 31, 2021 and 2020 was $0.4 million and $0.6 million, respectively.
Management is working withanalyzed our current leases due to the SmarterChaos sellers onCOVID-19 economic environment and maintain a reserve of approximately $3.0 million as a result of the working capital adjustment per the purchase agreement and expects that this will be resolvedcease use of certain leased properties (included in the fourth quarterfuture minimum lease payments above). As of 2020. RevenueMarch 31, 2021, $1.3 million is accrued for within Accrued expenses and net incomeother current liabilities and $1.7 million is accrued for SmarterChaos of $1.5 million and $0.1 million, respectively, were included inwithin Other non-current liabilities, on the unaudited condensed consolidated statements of operations duringbalance sheets.
At March 31, 2021, the three and nine months ended September 30, 2020.
UE Authority, Co.
On November 1, 2019,future minimum lease payments for the Company acquired UE for cashwere comprised of approximately $56.6 million, which includes closing purchase price adjustments. The acquisition of UE supports the Company’s strategy of broadening its reach in the insurance vertical.following (in thousands):
| | | | | |
| March 31, 2021 | |
| 2021 | $ | 1,562 | |
| 2022 | 1,963 | |
| 2023 | 1,966 | |
| 2024 | 1,537 | |
| 2025 | 404 | |
| Thereafter | 0 | |
| Total | $ | 7,432 | |
TheDuring the quarter ended March 31, 2021, the Company recognized a valuation cost reduction to the lease liability of $351 thousand. Restructuring charges incurred under the program were $0.3 million in 2020, which primarily used anconsisted of lease payments for existing charges net of lease income method, or discounted cash flow (“DCF”) analysis, which represent Level 3 fair value measurements,for properties that the Company was able to assess the components of its purchase price allocation. The acquisition was accounted for as a business combination, whereby the excess of the fair value of the business over the fair value of identifiable net assets was allocatedsublet to goodwill. The results of operations of the acquired business have been included in the Company’s results of operations since the acquisition date of November 1, 2019. The fair value of the acquired technology and customer relationships was determined using the multi period excess earnings approach. The fair value of the acquired brand was determined using the Relief from Royalty (“RFR”) method. The fair value of the non-competition agreement was determined using the income approach. As of September 30, 2020, the purchase accounting measurement period has not been finalized primarily due to open tax contingencies.other third parties.
The following table presentschange in liability for the preliminary fair value allocation ofrestructuring costs for the purchase price to the assets acquired, and liabilities assumed (in thousands):quarter ended March 31, 2021 follows:
| | | | | |
| Restructuring Lease Liability; | November 1, 2019 |
| |
GoodwillBeginning balance at December 31, 2020 | $ | 29,7233,653 | |
Technology Valuation adjustments | 26,000 (351) | |
Brand Lease payments | 690 (383) | |
Non-competition agreements Lease accretion | 1,52047 | |
Customer relationships | 10,300 | |
Other assets acquired | 6,393 | |
Liabilities assumed | (9,045) | |
Deferred tax liability | (8,961) | |
Net assets acquiredEnding balance at March 31, 2021 | $ | 56,6202,966 | |
The goodwill related
During the year ended December 31, 2020, the Company entered into negotiations with landlords to this transaction reflectsterminate lease agreements, for 12 different properties for a total approximately 62,113 square feet of office space located in Canada and the workforceUnited States. As of December 31, 2020, the Company concluded negotiations on three properties and synergies expected from combiningagreed to make payments to the operationslandlord totaling approximately $0.4 million in release of UE and is included inall future obligations under the Marketplace reportable segment. Intangible assets primarily consist of customer relationships, technology, non-competition agreements and brand with an estimated useful life of nine years, five years, three years and one year, respectively.leases.
NOTE 8.10. FAIR VALUE MEASUREMENTS
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.
Private Placement Warrants
As a result of the SEC Statement, the Company reevaluated the accounting treatment of the Company’s Warrants issued in connection with the Business Combination. The Private Placement Warrants were restated and recorded at fair value as a liability in the Company’s consolidated balance sheet as at December 31, 2020. The fair value of the Private Placement Warrants is considered a Level 3 valuation and is determined using the Black-Scholes-Merton valuation model.
As of March 31, 2021, the Company has approximately 4.0 million Private Placement Warrants outstanding.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | March 31, 2021 |
| Category | | Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total |
| Liabilities: | | | | | | | | | | |
| Private Placement Warrant liabilities | | Total liabilities | | $ | 0 | | | $ | 0 | | | $ | 22,390 | | | $ | 22,390 | |
| Total | | | | $ | 0 | | | $ | 0 | | | $ | 22,390 | | | $ | 22,390 | |
The following table represents the change in the warrant liability (in thousands):
| | | | | |
| Level 3 |
| December 31, 2020 | $ | 22,080 | |
| Additions | 0 | |
| Changes in fair value | 315 | |
| Exercised | (5) | |
| March 31, 2021 | $ | 22,390 | |
Contingent consideration related to acquisitions
The fair value of the contingent consideration for the Aimtell/PushPros/Aramis acquisition was determined using a Monte Carlo fair value analysis based on estimated performance and the probability of achieving certain targets. As certain inputs are not observable in the market, the contingent consideration is classified as a Level 3 instrument. During the nine months ended September 30, 2020, we paid thisChanges in fair value of contingent consideration of $1.0 million.are presented under Acquisition costs on the Income Statement.
The following table presents assets and liabilities measured at fair value on a recurring basis (in thousands):
| | | December 31, 2019 | | March 31, 2021 |
| Category | Category | | Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total | Category | | Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total |
| Liabilities: | Liabilities: | | | | | | | | | | | Liabilities: | | | | | | | | | | |
| Contingent consideration | Contingent consideration | | Contingent consideration payable | | $ | 0 | | | $ | 0 | | | $ | 1,000 | | | $ | 1,000 | | Contingent consideration | | Contingent consideration payable | | $ | 0 | | | $ | 0 | | | $ | 5,307 | | | $ | 5,307 | |
| Total | Total | | $ | 0 | | | $ | 0 | | | $ | 1,000 | | | $ | 1,000 | | Total | | $ | 0 | | | $ | 0 | | | $ | 5,307 | | | $ | 5,307 | |
The following table represents the change in the contingent consideration (in thousands):
| | | | | |
| Level 3 |
December 31, 20192020 | $ | 1,0000 | |
| Additions | 04,925 | |
| Changes in fair value | 0382 | |
| Settlements | (1,000)0 | |
September 30, 2020March 31, 2021 | $ | 05,307 | |
NOTE 9.11. EQUITY
Authorized Capitalization
The total amount of the Company’s authorized capital stock consists of (a) 600,000,000 shares of common stock, par value $0.0001 per share, of the DMS Inc., consisting of (i) 500,000,000 shares of Class A Common Stock, (ii) 60,000,000 shares of Class B Common Stock, (iii) 40,000,000 shares of Class C Common Stock, and (iv)(b) 100,000,000 shares of preferred stock, par value $0.0001 per share, of the DMS Inc. (“Company Preferred Stock”). As of September 30, 2020,March 31, 2021, there were 32,293,79333,686,599 shares of Class A Common Stock outstanding and 25,857,07025,999,464 shares of Class B Stock outstanding.
Company Common Stock
The following table sets forth the economic and voting interests of the Company’s common stockholders as of September 30, 2020:March 31, 2021:
| | | | | | | | | | | | | | |
| Class | Total Shares (1) | Economic Ownership
in DMSH (2) | Economic Ownership
in DMS Inc. (3) | Voting Ownership
in DMS Inc. (4) |
| Class A Common Stock | 32,293,793 | | 55.2 | % | 100.0 | % | 55.5 | % |
| Class B Common Stock | 25,857,070 | | 44.2 | % | 0 | % | 44.5 | % |
| | | | |
| (1) Represents the total number of outstanding shares for each class of DMS Inc. common stock as of September 30, 2020. |
| (2) Represents (i) the Class A Common Stock holders’ indirect economic interest in DMSH through their ownership of Class A Common Stock and (ii) the Class B Common Stock holders’ direct economic interest in DMSH through their ownership of DMSH Units. The remaining economic ownership is held by the sellers in SmarterChaos acquisition. |
| (3) Represents the aggregate economic interest in the DMS Inc. through the stockholders' ownership of Class A Common Stock. |
| (4) Represents the aggregate voting interest in the DMS Inc. through the stockholders' ownership of Company common stock. |
| | | | | | | | | | | | | | |
| Class | Total Shares (1) | Economic Ownership
in DMSH (2) | Economic Ownership
in DMS Inc. (3) | Voting Ownership
in DMS Inc. (4) |
| Class A Common Stock | 33,686,599 | | 56.2 | % | 100.0 | % | 56.4 | % |
| Class B Common Stock | 25,999,464 | | 43.3 | % | 0 | % | 43.6 | % |
| | | | |
| (1) Represents the total number of outstanding shares for each class of DMS Inc. common stock as of March 31, 2021. |
| (2) Represents (i) the Class A Common Stock holders’ indirect economic interest in DMSH through their ownership of Class A Common Stock and (ii) the Class B Common Stock holders’ direct economic interest in DMSH through their ownership of DMSH Units. The remaining economic ownership of 0.5% is held by the sellers in SmarterChaos acquisition. |
| (3) Represents the aggregate economic interest in DMS Inc. through the stockholders' ownership of Class A Common Stock. |
| (4) Represents the aggregate voting interest in DMS Inc. through the stockholders' ownership of Company common stock. |
Voting rights
Each holder of Company Common Stock is entitled to one (1) vote for each share of Company Common Stock held of record by such holder. The holders of shares of Company Common Stock do not have cumulative voting rights. Except as otherwise required in the Company Certificate of Incorporation or by applicable law, the holders of Class A Common Stock, Class B Common Stock and Class C Common Stock will vote together as a single class on all matters on which stockholders are generally entitled to vote (or, if any holders of Company Preferred Stock are entitled to vote together with the holders of Company Common Stock, as a single class with such holders of Company Preferred Stock). In addition to any other vote required in the Company Certificate of Incorporation or by applicable law, the holders of Class A Common Stock, Class B Common Stock and Class C Common Stock will each be entitled to vote separately as a class only with respect to amendments to the Company Certificate of Incorporation that increase or decrease the par value of the shares of such class or alter or change the powers, preferences or special rights of the shares of such class so as to affect them adversely. Notwithstanding the foregoing, except as otherwise required by law, holders of Company Common Stock, as such, will not be entitled to vote on any amendment to the Company Certificate of Incorporation (including any Preferred Stock Designation (as defined in the Company Certificate of Incorporation) relating to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon pursuant to the Company Certificate of Incorporation (including any Preferred Stock Designation relating to any series of Preferred Stock) or pursuant to the General Corporation Law of the State of Delaware (the “DGCL”).
Dividend rights
Subject to any other provisions of the Company Certificate of Incorporation, as it may be amended from time to time, holders of shares of Class A Common Stock are entitled to receive ratably, in proportion to the number of shares of Class A Common Stock held by them, such dividends and other distributions in cash, stock or property of the Company when, as and if declared thereon by the Company’s board of directors (the “Board”) from time to time out of assets or funds of the Company legally available therefor.
Except as provided in the Company Certificate of Incorporation, dividends and other distributions will not be declared or paid on the Class B Common Stock.
Subject to any other provisions of the Company Certificate of Incorporation, as it may be amended from time to time, holders of shares of Class C Common Stock are entitled to receive ratably, in proportion to the number of shares held by them, the dividends and other distributions in cash, stock or property of the Company payable or to be made on outstanding shares of Class A Common Stock that would have been payable on the shares of Class C Common Stock if each such share of Class C Common Stock had been converted into a fraction of a share of Class A Common Stock equal to the Conversion Ratio (as defined in the Company Certificate of Incorporation) immediately prior to the record date for such
dividend or distribution. The holders of shares of Class C Common Stock are entitled to receive, on a pari passu basis with the holders of the Class A Common Stock, such dividend or other distribution on the Class A Common Stock when, as and if declared by the Board from time to time out of assets or funds of the Company legally available therefor. At September 30, 2020,March 31, 2021, there were 0 shares of Class C Common Stock outstanding.
Redemption
Pursuant to the terms and subject to the conditions of the Amended Partnership Agreement, each holder (other than Blocker) of a DMSH Unit has the right (the “Redemption Right”) to redeem each such DMSH Unit for the applicable Cash Amount (as defined in the Amended Partnership Agreement), subject to the Company’s right, in its sole and absolute discretion, to elect to acquire some or all of such DMSH Units that such holder has tendered for redemption for a number of shares of Class A Common Stock, an amount of cash or a combination of both (the “Exchange Option”), in the case of each of the Redemption Right and the Exchange Option, on and subject to the terms and conditions set forth in the Company Certificate of Incorporation and in the Amended Partnership Agreement.
Retirement of Class B Common Stock
In the event that (i) any DMSH Unit is consolidated or otherwise cancelled or retired or (ii) any outstanding share of Class B Common Stock held by a holder of a corresponding DMSH Unit otherwise ceases to be held by such holder, in each case, whether as a result of exchange, reclassification, redemption or otherwise (including in connection with the Redemption Right and the Exchange Option as described above), then the corresponding share(s) of Class B Common Stock, if any, (which, for the avoidance of doubt, will be equal to such DMSH Unit divided by the Conversion Ratio prior to and until the Effective Time (as defined below) (in the case of (i)) or such share of Class B Common Stock (in the case of (ii)) will automatically and without further action on the part of the Company or any holder of Class B Common Stock be transferred to the Company for no consideration and thereupon will be retired and restored to the status of authorized but unissued shares of Class B Common Stock.
Rights upon Liquidation
In the event of any liquidation, dissolution or winding up (either voluntary or involuntary) of the Company after payments to creditors of the Company that may at the time be outstanding, and subject to the rights of any holders of Preferred Stock that may then be outstanding, holders of shares of Class A Common Stock and Company C Common Stock will be entitled to receive ratably, in proportion to the number of shares held by them, all remaining assets and funds of the Company available for distribution; provided, however, that, for purposes of any such distribution, each share of Class C Common Stock will be entitled to receive the same distribution as would have been payable if such share of Class C Common Stock had been converted into a fraction of a share of Company A Common Stock equal to the Conversion Ratio immediately prior to the record date for such distribution. The holders of shares of Class B Common Stock, as such, will not be entitled to receive any assets of the Company in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company.
Automatic Conversion of Class B Common Stock
Immediately and automatically upon the earlier of (i) July 4, 2024 andor (ii) the date on which there are no amounts owed to any lender pursuant to the Credit Facility, each share of Class B Common Stock will automatically and without any action on the part of the holder thereof, be reclassified as and changed, pursuant to a reverse stock split, into a fraction of a share of Class B Common Stock equal to the Conversion Ratio (the “Effective Time”).
Conversion of Class C Common Stock
Each holder of Class C Common Stock has the right, at such holder’s option, at any time, to convert all or any portion of such holder’s shares of Class C Common Stock, and the Company will have the right, at the Company’s option, from and after the Effective Time, to convert all or any portion of the issued and outstanding shares of Class C Common Stock, in each case into shares of fully paid and non-assessable Class A Common Stock at the ratio of 1 (1) share of Class A Common Stock for the number of shares of Class C Common Stock equal to the Issuance Multiple (as defined in the Business Combination Agreement) so converted.
March 31, 2021, there were no Class C Common Stock issued and outstanding.Transfers
The holders of shares of Class B Common Stock will not transfer such shares other than as part of a concurrent transfer of (i) if prior to the Effective Time, a number of DMSH Units equal to the number of shares of Company Common Stock being so Transferred multiplied by the Conversion Ratio or (ii) if after the Effective Time, an equal number of DMSH Units, in each case made to the same transferee in accordance with the restrictions on transfer contained in the Amended Partnership Agreement.
Other rights
No holder of shares of Company Common Stock are entitled to preemptive or subscription rights. There are no redemption or sinking fund provisions applicable to the Company Common Stock. The rights, preferences and privileges of holders of the Company Common Stock will be subject to those of the holders of any shares of the Preferred Stock the Company may issue in the future.
Preferred Stock
The Board has the authority to issue shares of preferred stock from time to time on terms it may determine, to divide shares of preferred stock into one or more series and to fix the designations, preferences, privileges, and restrictions of preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference, sinking fund terms, and the number of shares constituting any series or the designation of any series to the fullest extent permitted by the DGCL. The issuance of Preferred Stock of the Company could have the effect of decreasing the trading price of Company Common Stock, restricting dividends on the capital stock of the Company, diluting the voting power of the Company Common Stock, impairing the liquidation rights of the capital stock of the Company, or delaying or preventing a change in control of the Company. At September 30, 2020,March 31, 2021, there were 0 shares of preferred stock outstanding.
Public Warrants
Each Company Public Warrant entitles the registered holder to purchase one share of Class A Common Stock at a price of $11.50 per share, subject to adjustment. Pursuant to the warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares of Class A Common Stock. This means only a whole warrant may be exercised at a given time by a warrant holder. The warrants will expire five years after the Business Combination, at 5:00 p.m., New York City time, or earlier upon redemption or liquidation.
The Company Private Placement Warrants are not be redeemable by the Company so long as they are held by Sponsor or its permitted transferees. Sponsor, or its permitted transferees, has the option to exercise the Company Private Placement Warrants on a cashless basis. Except for the forgoing, the Company Private Placement Warrants have terms and provisions that are identical to those of the Company Public Warrants. If the Company Private Placement Warrants are held by holders other than Sponsor or its permitted transferees, the Company Private Placement Warrants will be redeemable by Company and exercisable by the holders on the same basis as the Company Public Warrants.
The Company may call the Company Public Warrants for redemption as follows: (1) in whole and not in part; (2) at a price of $0.01 per warrant; (3) upon a minimum of 30 days’ prior written notice of redemption; and (4) only if the last reported closing price of the Class A Common Stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders.
If the Company calls the Company Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Company Public Warrants to do so on a “cashless basis.”
The exercise price and number of Class A Common Stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a share dividend, recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of Class A Common Stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the warrant shares.
At September 30, 2020,March 31, 2021, approximately 14.010.0 million warrantsPublic Warrants were outstanding.
Non-controlling Interest
The non-controlling interest represents the membership interest in DMSH held by holders other than the Company. On July 15, 2020, upon the closeAs of the Business Combination,March 31, 2021, the Prism and Clairvest Direct Sellers combined ownership percentage in DMSH was 44.5%. On July 16,43.9% and as of December 31, 2020 DMSH issued approximately 307 thousand additional DMSH Units to the sellers in the SmarterChaos acquisition, which are included in the non-controlling interest of approximatelyit was 44.8%. The Company has consolidated the financial position and results of operations of DMSH and reflected the proportionate interest held by Prism, Clairvest Direct Seller and the SmarterChaos sellers as a non-controlling interest.
NOTE 10.12. RELATED PARTY TRANSACTIONS
Registration Rights
At the Closing, the Company entered into an amended and restated registration rights agreement with certain Sellers (the “Amended and Restated Registration Rights Agreement”), pursuant to which the Company registered for resale certain shares of Class A Common Stock and warrants to purchase Class A Common Stock that were held by the parties thereto. Additionally, the Sellers may request to sell all or any portion of their shares of Class A Common Stock in an underwritten offering that is registered pursuant to the shelf registration statement filed by the Company (each, an “Underwritten Shelf Takedown”); however, the Company will only be obligated to effect an Underwritten Shelf Takedown if such offering will include securities with a total offering price reasonably expected to exceed, in the aggregate, $20.0 million and will not be required to effect more than 4 Underwritten Shelf Takedowns in any six-month period. The Amended and Restated Registration Rights Agreement also includes customary piggy-back rights, subject to cooperation and cut-back provisions. The Company will bear the expenses incurred in connection with the filing of any such registration statements.
Amended Partnership Agreement
Pursuant to the Amended Partnership Agreement, following the expiration of the lock-up period under the lock-up agreement entered into by the Company and the Sellers at the Closing, the non-controlling interests (as defined in the Amended Partnership Agreement) will have the right to redeem their DMSH Units for cash (based on the market price of the shares of
Class A Common Stock) or, at the Company’s option, the Company may acquire such DMSH Units (which DMSH Units are expected to be contributed to Blocker) in exchange for cash or Class A Common Stock (a “Redemption”) on a 1-for-one basis (subject to customary conversion rate adjustments, including for stock splits, stock dividends and reclassifications), in each case subject to certain restrictions and conditions set forth therein, including that any such Redemption be for an amount no less than the lesser of 10,000 DMSH Units or all of the remaining DMSH Units held by such Non-Blocker Member. In the event of a change of control transaction with respect to a Non-Blocker Member, DMSH will have the right to require such Non-Blocker Member to effect a Redemption with respect to all or any portion of the DMSH Units transferred in such change of control transaction. In connection with any Redemption (other than a Redemption by the SmarterChaos sellers) a number of shares of Class B Common. Stock will automatically be surrendered and cancelled in accordance with the Company Certificate of Incorporation.
Tax Receivable Agreement
In conjunction with the Business Combination, DMS Inc. and Blocker also entered into the TRATax Receivable Agreement with the Sellers. Pursuant to the TRA,Tax Receivable Agreement, DMS Inc. is required to pay the Sellers (i) 85% of the amount of savings, if any, in U.S. federal, state and local income tax that DMS Inc. and Blocker actually realize as a result of (A) certain existing tax attributes of Blocker acquired in the Business Combination, and (B) increases in Blocker’s allocable shares of the tax basis of the assets of DMS and certain other tax benefits related to the payment of the cash consideration pursuant to the Business Combination Agreement and any redemptions or exchanges of DMS Units for cash or Class A Common Stock after the Business Combination and (ii) 100% of certain refunds of pre-Closing taxes of DMSH and Blocker received during a taxable year beginning within two (2) years after the Closing. All such payments to the Sellers are the obligation of DMS Inc., and not that of DMSH. As a result, the Company recorded a Deferreddeferred tax asset and income tax receivable of $18.4$20.1 million and $199 thousand, respectively, with the offset as a Long-term TRAlong-term Tax Receivable Agreement liability of $15.7$16.3 million and Additional Paid-in Capital of $2.8$4.0 million in the unaudited condensed consolidated balance sheets.
As of SeptemberMarch 30, 2020,2021, the total amount of paymentsliability under the TRATax Receivable Agreement was $15.7$16.3 million, of which $0.5 million$510 thousand was current and included in Accrued expenses and other current liabilities on the unaudited condensed consolidated balance sheet.
Lock-Up Agreement
At the Closing, Sellers executed and delivered to the Company a lock up agreement (the “Lock-Up Agreement”), pursuant to which, among other things, Sellers agreed not to, subject to certain exceptions set forth in the Lock-Up Agreement, during the period commencing from the Closing and through the 180 day anniversary of the date of the Closing (the “Lock-Up Period”): (i) lend, offer, pledge, hypothecate, encumber, donate, assign, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of any Class A Common Stock, or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of Class A Common Stock, whether any such transaction described in clauses (i) or (ii) above is to be settled by delivery of Class A Common Stock or other securities, in cash or otherwise. Any waiver by the Company of the provisions of the Lock-Up Agreement requires the approval of a majority of the Company’s directors who qualify as “independent” for purposes of serving on the audit committee under the applicable rules of the SEC (including Rule 10A-3 of the Securities Exchange Act of 1934).
On July 29, 2020, the Company’s Chief Executive Officer (“CEO”) and Chief Operating Officer (“COO”) executed joinder agreements to the Lock-Up Agreement in connection with Prism’s distribution of 538,912 and 538,911 Seller Warrants to the Company’s CEO and COO, respectively, as a permitted transfer under the Amended Warrant Agreement and the Lock-Up Agreement.
Management Agreement
InPrior to the Business Combination, the Management Agreement included consideration for various management and advisory services, where DMSH paysmade payment to one of its members a quarterly retainer of $50 thousand plus any out-of-pocket expenses. The total expense for the nine monthsyears ended September 30,December 31, 2020 and 2019 was $0.1 million and $0.2 million, respectively, which was recorded in General and administrative expenses in the unaudited condensed consolidated statements of operations. The management agreement was terminated in connection with the Business Combination.
DMSH Member Tax Distributions
ForPrism Incentive Agreement
On October 1, 2017, DMS, through a subsidiary, acquired the nine months ended September 30,assets of Mocade Media LLC (“Mocade”). On that date, in connection with the acquisition, DMS also entered into a consulting agreement with Singularity Consulting LLC (“Singularity”), a Texas limited liability company owned by the former management of Mocade. On August 1, 2018, in order to further incentivize Singularity’s efforts with respect to the acquired Mocade assets, DMS entered into an amendment to the Singularity consulting agreement. On that date, Prism Data, the then majority equityholder of DMS, also entered into an incentive agreement with Singularity, to which DMS was not a party, providing for certain incentive payments to be accounted
for in accordance with applicable accounting standards by Prism Data to Singularity in the event of certain specified change of control sale transactions involving DMS. Following the Business Combination, in November 2020, DMS and 2019, tax distributionsSingularity resolved all outstanding amounts due under the Singularity consulting agreement between DMS and Singularity with a payment of $850,000. In addition, Prism Data and Singularity agreed that Singularity would be entitled to membersa payment from Prism Data of DMSH were $0.2 million and $21.6 million, respectively.$2,000,000 in the event of certain specified change of control sale transactions involving DMS.
NOTE 11. BENEFIT13. EMPLOYEE AND DIRECTOR INCENTIVE PLANS
2020 Omnibus Incentive Plan
On July 15, 2020, Leo’s shareholders approved the 2020 Omnibus Incentive Plan (the “2020 Plan”). The 2020 Plan allows for the issuance of stock options, stock appreciation rights, stock awards (including restricted stock awards (“RSAs”) and Restricted Stock Units (“RSUs”) and other stock-based awards. Directors, officers and employees, as well as others performing independent consulting or advisory services for the Company or its affiliates, will be eligible for grants under the 2020 Plan. The aggregate number of shares reserved under the 2020 Plan is approximately 11.6 million. The 2020 Plan terminates on June 24, 2030.
On January 14, 2021, the Board of Directors of DMS Inc. approved additional employee quarterly grant for new employees of the Company with 36,790 RSUs under the 2020 Plan. The RSUs vest one-third each year based on three years of employee continuous service. The 2020 Plan provides Directors’ vesting rights after each year for completed service to the Company.
The participants have no rights of a stockholder with respect to the RSUs, including the right to vote and the right to receive distributions or dividends until the shares become vested and settled. The settlement occurs after the vesting date and shall represent the right to receive 1 Share of Class A of common stock. RSUs awards provide for accelerated vesting if there is a change in control.
The fair value of non-vested shares is determined based on the closing trading price of the Company’s shares on the grant date and are amortized over the award’s service period. At March 30, 2021, total non-vested stock-based compensation expense related to restricted stock was $8.5 million, which will be recognized over a weighted-average remaining period of 2.29 years. The weighted-average grant-date fair value of shares granted during the year ended March 30, 2020, were $7.09 per share.
Restricted Shares
The following table presents the restricted share activity for the year ended March 31, 2021 (in thousands, except price per share):
| | | | | | | | | | | | | | |
| Restricted Stock Units | | Number of Restricted Stock | | Weighted-Average Grant Date Fair Value |
| Outstanding at December 31, 2020 | | 1,198 | | | $ | 7.31 | |
| Granted | | 37 | | | $ | 11.65 | |
| Forfeited/Canceled | | (95) | | | $ | 11.65 | |
| Vested | | 0 | | | $ | 0 | |
| Outstanding at March 31, 2021 | | 1,140 | | | $ | 7.09 | |
| Vested at March 31, 2021 | | 0 | | | 0 | |
As of March 31, 2021, the Company has 2 shared-based compensation plans: restricted share units and stock options. The compensation cost that has been recorded against Consolidated Statement of Operations, “Salaries and related costs” was approximately $1.4 million.
The Company’s 2020 Omnibus Incentive Plan, which is shareholder-approved, permits the grant of share options and shares to its employees up to 11.6 million shares of Class A Common Stock. The Company believes that such awards better align the interest of its employees with those of its shareholders. Stock option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards vest on 3 years of continuous service and have 10-year contractual terms. The 2020 Plan allows employees’ vesting rights after each year for completed service to the Company.
The participants have no rights of a stockholder with respect to the stock options, including the right to vote and the right to receive distributions or dividends until the shares become vested and exercised. The exercise occurs after the vesting date and the participant may exercise the option by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by full payment of the exercise price or by means of a broker-assisted cashless exercise. Stock option awards provide for accelerated vesting if there is a change in control.
The fair value of each option award is estimated on the date ofgrant using the Black-Scholes valuation method, which uses the assumptions noted in the following table. Because Black-Scholes option valuation models incorporate ranges of assumption for inputs, the selected inputs are disclosed below. Expected volatilities are based on implied volatilities from traded options on the Company’s peer group. The expected term of an option granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding; the below range results from certain Company’s peer group of employees exhibiting different behavior. The Company’s common stock began trading on April 20, 2018; no cash dividends have been declared since that time, and we do not anticipate paying cash dividends in the foreseeable future. The risk-free rate within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. We recognize forfeitures and/or cancellations based on an actual occurrence.
Stock Options
The following is the weighted average of the assumptions used in calculating the fair value of the total stock options granted in 2020 using the Black-Scholes method:
| | | | | |
| Fair market value | $ | 3.28 | |
| Risk-free rate | 0.5 | % |
| Dividend yield | 0 | % |
| Expected volatility | 49.3 | % |
| Expected term (in years) | 5.8 years |
The following table presents the stock option activity for the quarter ended March 31, 2021 (in thousands, except price per share):
| | | | | | | | | | | | | | | | | | | | |
| Stock Options | | Number of Stock Options | | Weighted-Average Grant Date Fair Value | Weighted-Average Remaining Contractual Term (in Years) | Total Intrinsic Value of Restricted Stock Vested |
| Outstanding at January 1, 2021 | | 550 | | | $ | 3.34 | | 5.8 years | $ | — | |
| Granted | | 27 | | | $ | 5.27 | | 5.8 years | $ | — | |
| Exercised | | 0 | | | $ | 0 | | — | | $ | — | |
| Forfeited/expired | | (44) | | | $ | 5.27 | | — | | $ | — | |
| Outstanding at March 31, 2021 | | 533 | | | $ | 3.28 | | 5.8 years | $ | — | |
| Vested at March 31, 202 | | — | | | — | | — | | — | |
| Exercisable at March 31, 2021 | | — | | | — | | — | | — | |
The weighted-average grant-date strike price of options during the quarter ended March 31, 2021 was $11.65 per share. The total intrinsic value of options exercised during the quarter ended March 31, 2021, was $0. The weighted-average grant-date fair value of shares granted during the quarter ended March 31, 2021, was $3.28 per share. During the three monthsquarter ended September 30, 2020,March 31, 2021, there were 0 shares grantedor units converted into Class A Common Stock, or exercised from restricted stock units, stock options or warrants.
The following table presents non-vested shares for the quarter ended March 31, 2021 (in thousands, except price per share):
| | | | | | | | | | | | | | |
| Non-vested Shares | | Shares (000) | | Weighted-Average Grant Date Fair Value |
| Non-vested at January 1, 2021 | | 1,748 | | | $ | 6.06 | |
| Granted | | 64 | | | $ | 8.96 | |
| Vested | | 0 | | | $ | 0 | |
| Forfeited | | (139) | | | $ | 9.62 | |
| Non-vested at March 31, 2021 | | 1,673 | | | $ | 5.88 | |
| | | | |
As of March 31, 2021, the total value of unvested shares was $10.3 million under the 2020 Plan.
Employee Incentive Plan
That cost is expected to be recognized over a weighted-average period of 2.29 years. The Company instituted a transaction-based cash bonus plan, the Digital Media Solutions, LLC Employee Incentive Plan (the “EIP”), in 2017, which was amended and restated on January 31, 2019. The EIP provides for a cash bonus pool payout tototal fair value of shares vested participants upon the occurrence of a “Sale of the Company” prior to December 31, 2024, in which the equity value (as determined by the board of managers) exceeds $100 million. Each EIP participant was awarded a number of bonus pool units, and is entitled to a pro rata share of the aggregate bonus pool based on the total number of vested bonus pool units held among all participants. DMSH also instituted a second transaction-based cash bonus plan on November 1, 2019, which mirrors the first plan, except that the equity value was raised to $325 million.
On April 23, 2020, DMSH entered into a Business Combination with Leo. Although this business combination is not considered a “Sale of the Company” for purposes of the EIP, the board of managers was permitted at its discretion to make a payment under the plan as it deemed fit upon consummation of the business combination. The board of managers elected to pay a total of approximately $250 thousand in cash to EIP participants in connection with the Business Combination, which was paid during the three and nine monthsquarter ended September 30, 2020, and these plans were terminated.March 31, 2021, was $0.
NOTE 12.14. COMMITMENTS AND CONTINGENCIES
Legal proceedings
The Company is subject to legal, regulatory and other proceedings and claims that arise in the ordinary course of business. An estimated liability is recorded for those proceedings and claims when the loss from such proceedings and claims becomes probable and reasonably estimable. The risk of loss is reassessed each quarter and liabilities are adjusted as new information becomes available. The actual cost of resolving a claim may be substantially different from the amount of the liability recorded. Differences between the estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on the consolidated financial position, but could be material to the consolidated results of operations or cash flows for any one period.
Lease agreements
The Company leases certain office locations, including both long-term and short-term leases, with several leases offering renewal options. Rent expense for the ninethree months ended September 30,March 31, 2021 and 2020 and 2019 was $1.9$0.4 million and $1.5$0.6 million, respectively.
At September 30, 2020,March 31, 2021, the future minimum lease payments for the Company were comprised of the following (in thousands):
| | Year Ending December 31: | | |
| 2020 | $ | 595 | | |
| March 31, 2021 | | March 31, 2021 | |
| 2021 | 2021 | 2,040 | | 2021 | $ | 1,562 | |
| 2022 | 2022 | 1,941 | | 2022 | 1,963 | |
| 2023 | 2023 | 1,806 | | 2023 | 1,966 | |
| 2024 | 2024 | 1,304 | | 2024 | 1,537 | |
| 2025 | | 2025 | 404 | |
| Thereafter | Thereafter | 425 | | Thereafter | 0 | |
| Total | Total | $ | 8,111 | | Total | $ | 7,432 | |
Management analyzed our current leases due to the COVID-19 economic environment and recorded a reserve of approximately $1.0$3.0 million as a result of the cease use of certain leased properties (included in the future minimum lease payments above), whichwas included in General and administrative expenses in the unaudited condensed consolidated statements of operations during the three and nine months ended September 30, 2020.. As of September 30, 2020, $0.9March 31, 2021, $1.3 million is accrued for within Accrued expenses and other current liabilities and $0.1$1.7 million is accrued for within Other non-current liabilities, on the unaudited condensed consolidated balance sheets.
DMSH Unit Redemption Rights
The Amended and Restated Partnership Agreement includes provisions intended to ensure that the Company at all times maintains a 1-to-one ratio between (i) the number of outstanding shares of Class A Common Stock (including the number of shares of Class A Common Stock into which all of the outstanding shares of Class C Common Stock are convertible in accordance with the Company Certificate of Incorporation) and (ii) the aggregate number of DMSH Units owned by DMS Inc., its subsidiaries and any consolidated, combined, unitary or similar group of entities that join in filing any tax return with DMS Inc.
NOTE 13.15. INCOME TAXES
As a result of the Business Combination, the Company consists of DMS Inc. and its wholly-owned subsidiary, Blocker, which owns 55.2%56.2% of equity interests in DMSH (after the SmarterChaos acquisition).DMSH. DMSH is treated as a partnership for purposes of U.S. federal and certain state and local income tax. As a U.S. partnership, generally DMSH will not be subject to corporate income taxes (except with respect to UE, as described below). Instead, each of the ultimate partners (including DMS Inc.) are taxed on their proportionate share of DMSH taxable income.
While the Company consolidates DMSH for financial reporting purposes, the Company will only be taxed on its allocable share of future earnings (i.e. those earnings not attributed to the non-controlling interests, which continue to be taxed on their own allocable share of future earnings of DMSH). The Company’s income tax expense is attributable to the allocable share of
earnings from DMSH, a portion of activities of DMSH that are subject to Canadian income tax, and the activities of UE, a wholly-owned U.S. corporate subsidiary of DMSH, which is subject to U.S. federal and state and local income taxes. The income tax burden on the earnings allocated to the non-controlling interests is not reported by the Company in its condensed consolidated financial statements under GAAP. As a result, the Company’s effective tax rate is expected to differ materially from the statutory rate.
The Company’s tax provision or benefit from income taxes for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any. Each quarter the Company updates its estimate of the annual effective tax rate and makes a year-to-date adjustment to the provision. The Company recorded income tax expense of $1.6 million$117 thousand for the three months ended September 30, 2020.March 31, 2021. The blended effective tax rate for the three and nine months ended September 30, 2020March 31, 2021 was 74.2%124.64%, which varies from our statutory U.S. tax rate due to the tax impact of the change in fair value of warrant liabilities, change in fair value of contingent liabilities, and taxable income or loss that is allocated to the non-controlling interest. The Company recorded no$52 thousand income tax expense or benefit for the three and nine months ended September 30, 2019.
Tax Receivable Agreement
In conjunction with the Business Combination, DMS Inc. and Blocker also entered into the TRAa Tax Receivable Agreement with the Sellers. Pursuant to the TRA,Tax Receivable Agreement, DMS Inc. is required to pay the Sellers (i) 85% of the amount of savings, if any, in U.S. federal, state and local income tax that DMS Inc. and Blocker actually realize as a result of (A) certain existing tax attributes of Blocker acquired in the Business Combination, and (B) increases in Blocker’s allocable share of the tax basis of the assets of DMS and certain other tax benefits related to the payment of the cash consideration pursuant to the Business Combination Agreement and any redemptions or exchanges of DMS Units for cash or Class A Common Stock after the Business Combination and (ii) 100% of certain refunds of pre-Closing taxes of DMSH and Blocker received during a taxable year beginning within two (2) years after the Closing. All such payments to the Sellers are the obligation of DMS Inc., and not that of DMSH. As a result of the Business Combination,this agreement, the Company recorded as of December 31, 2020, a Deferreddeferred tax asset and income tax receivable of $18.4$20.1 million and $199 thousand, respectively, with the offset as a Long-term TRAlong-term Tax Receivable Agreement liability of $15.7$16.3 million and Additional Paid-in Capital of $2.8$4.0 million in the unaudited condensed consolidated balance sheet.sheets.
As of September 30, 2020,March 31, 2021, the total amount of payments under the TRA was $15.7$16.3 million, of which $0.5 million was current and included in Accrued expenses and other current liabilities on the unaudited condensed consolidated balance sheet.
CARES ActASU 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”
On March 27, 2020,In December 2019, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was signed into law. The CARES Act includesFASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" ("ASU 2019-12”), which is intended to simplify various aspects related to accounting for income tax provisions relating to net operating loss carryback periods, alternative minimum tax credit refunds, modificationstaxes. ASU 2019-12 removes certain exceptions to the net interest deduction limitationsgeneral principles in Topic 740 and technical correctionsalso clarifies and amends existing guidance to tax depreciation methods for qualified improvement property. The Company benefited from the deferral of payroll taxes and expects to continue to benefitimprove consistent application. This new guidance was effective for the remainder of 2020. Management is still evaluating allCompany beginning on January 1, 2021, and did not have a material impact on the impacts of the CARES Act on our business.Company’s condensed consolidated financial statements.
NOTE 14.16. EARNINGS PER SHARE
Basic earnings per share of Class A common stock is computed by dividing net income attributable to DMS Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income attributable to DMS Inc., adjusted for the assumed exchange of all potentially dilutive securities, by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive elements. Diluted loss per share for all period presented is the same as basic loss per share as the inclusion of the potentially issuable shares would be anti-dilutive.
Prior to the Business Combination, the membership structure of DMSH included units which had profit interests. The Company analyzed the calculation of earnings per unit for periods prior to the Business Combination and determined that it resulted in values that would not be meaningful to the users of these unaudited condensed consolidated financial statements. Therefore,
earnings per share information has not been presented for periods prior to the Business Combination on July 15, 2020. The basic and diluted earnings per share for the three and nine months ended September 30, 2020 represent only the shares earned during the period of July 15, 2020January 1, 2021 to September 30, 2020.March 31, 2021.
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock:
| | | | | | | | | | | | | | |
| | Three Months Ended
September 30, 2020 | | Nine Months Ended
September 30, 2020 |
| Numerator: | | | | |
| Net (loss) income | | $ | (2,178) | | | $ | 713 | |
| Less: Net loss attributable to DMSH prior to the Business Combination | | (4,236) | | | (1,345) | |
| Less: Net income attributable to noncontrolling interests subsequent to the Business Combination | | 921 | | | 921 | |
| Net income attributable to DMS Inc. | | $ | 1,137 | | | $ | 1,137 | |
| Denominator: | | | | |
| Weighted-average shares of Class A Common Stock outstanding - basic and diluted | | 32,294 | | | 32,294 | |
| | | | |
| Earnings per share of Class A Common Stock - basic and diluted | | $ | 0.04 | | | $ | 0.04 | |
| | | | | | | | | | |
| | Three Months Ended March 31, | | |
| Numerator: | | | | |
| Net (loss) income before income taxes | | $ | (212) | | | |
| Less: Net income attributable to non-controlling interests | | (93) | | | |
| Net income attributable to DMS Inc. | | $ | (119) | | | |
| Denominator: | | | | |
| Weighted-average shares of Class A Common Stock outstanding - basic and diluted | | 33,241 | | | |
| | | | |
| Earnings per share of Class A Common Stock - basic and diluted | | $ | 0 | | | |
Shares of the Company’s Class B common stock, warrants, restricted stock units and stock options do not participate in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.
At September 30, 2020, the Company excluded 25.9 millionPotential shares of Class B Common Stock, 14.0 million warrants outstanding, and the DMSH Units issuedcommon stock not included in the SmarterChaos acquisition ascomputation of earnings per share because their effect would have been anti-dilutive.be antidilutive includes Stock Based Compensation for 84,009 Options and 530,745 RSUs, Warrants of 505,130 Public and 202,052 Private Placement, contingent consideration which could be settled in common stock of 1,237,636 and convertible equity of 26,306,841.
On October 28, 2020,January 14, 2021, the Board of Directors of DMS Inc. approved the grant ofand granted approximately 1.2 million36,790 RSUs and 0.6 million27,000 in stock options granted to the Company’s new employees and directors under the 2020 Omnibus Incentive Plan. Refer to Note 11. Benefit13. Employee and Director Incentive Plans for a description of the Company’s stock incentive plan.
Note. 17 Subsequent Events
On April 1, 2021, the Company has completed a transaction to purchase the assets of Crisp Marketing, LLC (“Crisp Results”). Crisp Results is a digital performance advertising company that connects consumers with brands within the insurance sector, with primary focus on the Medicare insurance industry. Crisp Results is known for providing predictable, reliable, flexible and scalable customer acquisition solutions, supporting large brands with a process that combines data, design, technology and innovation. The Company paid consideration of $40.0 million upon closing of the transaction, consisting of $20.0 million cash and Class A Common Stock valued at $20.0 million. The transaction also includes up to $10.0 million in contingent consideration to be earned over the next 12 months, subject to the acquired companies reaching certain milestones, and a $5.0 million deferred payment. The contingent consideration and deferred payment can be paid in cash or stock at the election of the Company.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS OVERVIEW
The Company is a premier performance-based marketing company offering a diversified customer leads and software delivery platform that drives high value, high intent leads to our customers. The Company is headquartered in Clearwater, Florida with nearly 400approximately 405 employees at September 30, 2020as of March 31, 2021, located at our headquarters and satellite offices throughout the United States and Canada. We are a major contributor to the structural shift from traditional media to the online and digital arena currently ongoing in the advertising industry. Through our cutting-edge technologies and multi-faceted platforms, the Company enables advertising customers to more closely track, monitor and adjust marketing campaigns based on their return on investment.
The Company operates as a performance marketing engine for companies across numerous industries, including consumer finance, education, automotive, insurance, home services, brand performance, health and wellness and career placements. We also operate in managed services that provides better access and control over the advertising spend of our customers, including marketing automation and SaaS.
We classify our operations into three reportable segments: Brand Direct, Marketplace and Other. Under the Brand Direct reportable segment, revenues are earned from fees we charge to our customers when we advertise directly for them under their
brand name. In servicing our customers under this reportable segment, the end consumer of our customer interacts directly with our customer and does not interface with the Company at any point during the transaction process. Under the Marketplace reportable segment, we earn revenues from fees we charge to our customers when we advertise their business under our brand name. The end consumer interfaces directly with our brand and may be redirected to our customer based on information obtained during the transaction process. Under the Other reportable segment, we earn revenues from fees for other services provided to our customers such as the management of digital media services on behalf of our customers as well as SaaS.
Recent Business Acquisitions
Our acquisitions in the past few years have enabled us to expand our reach into high quality proprietary targeted media solutions in a wide range of industries.
On February 1, 2021, the Company acquired Aimtell, Inc. (“Aimtell”), PushPros, Inc. (“PushPros”) and Aramis Interactive (“Aramis”). Aimtell and PushPros are leading providers of technology-enabled digital performance advertising solutions connecting consumers and advertisers within home, auto, health and life insurance. Aramis is a network of owned-and-operated websites that leverages the Aimtell and PushPros technologies and relationships.
The Company paid consideration of $20.0 million at the closing transaction, consisting of $5.0 million in cash and approximately 1.29 million shares of Class A Common Stock valued at $15.0 million, subject to a lock-up agreement. The transaction also includes up to $15.0 million in contingent consideration to be earned over the next three years, subject to the acquired companies reaching certain milestones. The contingent consideration can be paid in cash or capital stock at the election of the Company (see Note 8. Acquisitions).
On July 16, 2020, we purchased substantially all assets and business of SmarterChaos for cash and equity of DMSH totaling approximately $5.8 million. We believe this acquisition will create expanded media distribution, allowing the Company to further accelerate the digital marketing acquisition efforts of our advertiser customers and enable brands to acquire new customers by leveraging our customer acquisition platform and the relationships cultivated by the SmarterChaos team.
On November 1, 2019, we purchased substantially all assets and business of UE for cash of approximately $56.6 million. UE generates and purchases leads, clicks or calls for sale to its carriers and agent customers. Post-acquisition, UE was rebranded to DMS Insurance, a component of the Marketplace reportable segment. Through the acquisition of UE, we launched into the digital insurance advertising marketplace as a key player with a comprehensive suite of products that connect high-intent consumers with our nation’s largest auto, home, health and life insurance providers, allowing for continued expansion in the insurance vertical.
Factors Affecting Our Business
Management of high quality targeted media sources
In the digital marketing solutions industry, it is essential that advertising service providers are able to acquire and retain high quality media sources that attract targeted users for advertiser customers on a large scale at low cost. This can be particularly challenging given the dynamic nature of the media resources available to advertising service providers. Frequent updates in search engine algorithms and consolidation of media sources result in high costs of retaining high quality media sources. This, combined with high levels of competition by a large number of service providers, drives up costs within the advertising industry.
To combat this challenge, we have formed strategic partnerships through acquisitions with other advertising and proprietary media marketing software providers to increase our access to high quality targeted media. OurFor example our prior acquisitions of W4, Holding Company, LLC and UE provide us access to proprietary software to drive meaningful engagement with advertising targets.
Regulation
Federal, state and industry-based regulations impact the businesses of our customers and in turn impact our revenues. Increased regulations can cause customers to reduce their expenditures and thus, their advertising budgets, which can potentially lower our revenues.
Macro-economic conditions
During 2020, the U.S. economy increasingly suffered the adverse effects of the COVID-19 economic and health crisis. Macro-economic factors, such as the level of interest rates, credit availability and the level of unemployment, including during economic downturns and global pandemics, could all have anhad some adverse impact on our customers’ costs of services and their demand for our services and our revenues. Any difficulties faced by our customers due to hardships in the economy could causecaused a reduction in their advertising budgets as they seek to manage expenses in general.
Conversely, to an extent, we believe that the digital media advertising industry iswas also countercyclicalcounter-cyclical to macro-economic conditions since some customers increaseincreased their advertising and promotion efforts in times where consumers arewhere more difficult to acquire. This enablesenabled us to ease the downward impact on our revenues during a downturn in the economy.
Our technologies can be securely accessed remotely, which put us in a good position to seamlessly transition to operating our business remotely during the ongoing COVID-19 pandemic.pandemic and beyond. Feedback from employee surveys indicate that our employees have embraced and prefer to continue to work in a remote environment, which caused us to look to a more flexible working environment. During the third quarter in 2020, management analyzedManagement continues to analyze our leaseslease contracts and closedoptions to close and sublease certain office locations and will continue to analyze the Company’s capacity needsrequirements into the fourth quarter and beyond.future.
RESULTS OF OPERATIONS
The following table presents our consolidated results of operations as a percentage of net revenue:
| | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended March 31, | | |
| | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | | 2021 | | | 2020 | | |
| Revenue by type: | Revenue by type: | | | | | | | | | | | | Revenue by type: | | | | | | | |
| Customer acquisition | Customer acquisition | | | 90.2 | % | | | 92.2 | % | | | 92.1 | % | | | 91.7 | % | Customer acquisition | | | 94.4 | % | | | 94.9 | % | | |
| Managed services | Managed services | | | 8.8 | % | | | 6.4 | % | | | 6.9 | % | | | 6.9 | % | Managed services | | | 4.0 | % | | | 4.0 | % | | |
| Software services | Software services | | | 1.0 | % | | | 1.4 | % | | | 1.0 | % | | | 1.4 | % | Software services | | | 1.6 | % | | | 1.1 | % | | |
| Total Net revenue | Total Net revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | Total Net revenue | | | 100.0 | % | | | 100.0 | % | | |
| Revenue by segment: | Revenue by segment: | | | | | | | | | | | | | Revenue by segment: | | | | | | | | |
| Brand Direct | Brand Direct | | | 59.4 | % | | | 77.3 | % | | | 58.7 | % | | | 77.5 | % | Brand Direct | | | 58.0 | % | | | 56.2 | % | | |
| Marketplace | Marketplace | | | 47.7 | % | | | 27.0 | % | | | 47.2 | % | | | 27.2 | % | Marketplace | | | 50.9 | % | | | 47.0 | % | | |
| Other | Other | | | 3.5 | % | | | 2.3 | % | | | 2.3 | % | | | 2.5 | % | Other | | | 2.1 | % | | | 1.7 | % | | |
| Corporate and other | Corporate and other | | | (10.6) | % | | | (6.6) | % | | | (8.2) | % | | | (7.2) | % | Corporate and other | | | (11.0) | % | | | (5.0) | % | | |
| Total Net revenue | Total Net revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | Total Net revenue | | | 100.0 | % | | | 100.0 | % | | |
| | Salaries and related costs | Salaries and related costs | | | 9.5 | % | | | 11.5 | % | | | 10.5 | % | | | 11.8 | % | Salaries and related costs | | | 10.6 | % | | | 11.5 | % | | |
| General and administrative | General and administrative | | | 7.7 | % | | | 7.8 | % | | | 7.1 | % | | | 7.8 | % | General and administrative | | | 7.2 | % | | | 7.3 | % | | |
| Acquisition costs | Acquisition costs | | | 3.9 | % | | | 20.3 | % | | | 1.4 | % | | | 10.1 | % | Acquisition costs | | | 1.5 | % | | | — | % | | |
| Depreciation and amortization | Depreciation and amortization | | | 5.6 | % | | | 3.8 | % | | | 5.8 | % | | | 3.6 | % | Depreciation and amortization | | | 5.6 | % | | | 5.9 | % | | |
| Income (loss) from operations | Income (loss) from operations | | | 3.5 | % | | | (11.3) | % | | | 5.8 | % | | | (0.9) | % | Income (loss) from operations | | | 3.6 | % | | | 6.3 | % | | |
| Interest expense | Interest expense | | | 4.1 | % | | | 5.2 | % | | | 4.6 | % | | | 4.3 | % | Interest expense | | | 3.4 | % | | | 5.2 | % | | |
| Change in fair value of warrant liabilities | | Change in fair value of warrant liabilities | | | 0.3 | % | | | — | % | | |
| Net (loss) income before income taxes | Net (loss) income before income taxes | | | (0.7) | % | | | (16.5) | % | | | 1.1 | % | | | (5.2) | % | Net (loss) income before income taxes | | | (0.1) | % | | | 1.1 | % | | |
| Income tax expense | Income tax expense | | | 2.0 | % | | | — | % | | | 0.8 | % | | | — | % | Income tax expense | | | 0.1 | % | | | 0.1 | % | | |
| Net (loss) income | Net (loss) income | | | (2.6) | % | | | (16.5) | % | | | 0.3 | % | | | (5.2) | % | Net (loss) income | | | (0.2) | % | | | 1.0 | % | | |
| Net loss attributable to non-controlling interest | Net loss attributable to non-controlling interest | | | (4.0) | % | | | — | % | | | (0.2) | % | | | — | % | Net loss attributable to non-controlling interest | | | (0.1) | % | | | — | % | | |
| Net income (loss) attributable to Digital Media Solutions, Inc. | Net income (loss) attributable to Digital Media Solutions, Inc. | | | 1.4 | % | | | (16.5) | % | | | 0.5 | % | | | (5.2) | % | Net income (loss) attributable to Digital Media Solutions, Inc. | | | (0.1) | % | | | 1.0 | % | | |
Operating Results for three and nine months ended September 30,March 31, 2021 and March 31, 2020 and September 30, 2019
The following table presents the consolidated results of operations for the three and nine months ended September 30,March 31, 2021 and 2020 and 2019 and the changes from the prior periods (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | | |
| | 2020 | | 2019 | | $ Change | | % Change | | 2020 | | 2019 | | $ Change | | % Change | | 2021 | | 2020 | | $ Change | | % Change | | |
| Net revenue | Net revenue | $ | 82,829 | | | $ | 57,575 | | | $ | 25,254 | | | 44 | % | | $ | 230,753 | | | $ | 173,142 | | | $ | 57,611 | | | 33 | % | Net revenue | $ | 96,803 | | | $ | 72,728 | | | $ | 24,075 | | | 33 | % | | |
| Cost of revenue | Cost of revenue | 57,777 | | | 39,101 | | | 18,676 | | | 48 | % | | 160,338 | | | 117,084 | | | 43,254 | | | 37 | % | Cost of revenue | 69,182 | | | 50,159 | | | 19,023 | | | 38 | % | | |
| | Salaries and related costs | Salaries and related costs | 7,882 | | | 6,599 | | | 1,283 | | | 19 | % | | 24,114 | | | 20,495 | | | 3,619 | | | 18 | % | Salaries and related costs | 10,269 | | | 8,331 | | | 1,938 | | | 23 | % | | |
| General and administrative | General and administrative | 6,407 | | | 4,479 | | | 1,928 | | | 43 | % | | 16,356 | | | 13,514 | | | 2,842 | | | 21 | % | General and administrative | 6,962 | | | 5,297 | | | 1,665 | | | 31 | % | | |
| Acquisition costs | Acquisition costs | 3,248 | | | 11,707 | | | (8,459) | | | (72) | % | | 3,322 | | | 17,492 | | | (14,170) | | | (81) | % | Acquisition costs | 1,494 | | | 27 | | | 1,467 | | | 5433 | % | | |
| Depreciation and amortization | Depreciation and amortization | 4,636 | | | 2,201 | | | 2,435 | | | 111 | % | | 13,307 | | | 6,165 | | | 7,142 | | | 116 | % | Depreciation and amortization | 5,419 | | | 4,315 | | | 1,104 | | | 26 | % | | |
| Income (loss) from operations | Income (loss) from operations | 2,879 | | | (6,512) | | | 9,391 | | | (144) | % | | 13,316 | | | (1,608) | | | 14,924 | | | (928) | % | Income (loss) from operations | 3,477 | | | 4,599 | | | (1,122) | | | (24) | % | | |
| Interest expense | Interest expense | 3,421 | | | 2,980 | | | 441 | | | 15 | % | | 10,702 | | | 7,389 | | | 3,313 | | | 45 | % | Interest expense | 3,257 | | | 3,790 | | | (533) | | | (14) | % | | |
| Change in fair value of warrant liabilities | | Change in fair value of warrant liabilities | 315 | | | — | | | 315 | | | — | % | | |
| Net (loss) income before income taxes | Net (loss) income before income taxes | (542) | | | (9,492) | | | 8,950 | | | (94) | % | | 2,614 | | | (8,997) | | | 11,611 | | | (129) | % | Net (loss) income before income taxes | (95) | | | 809 | | | (904) | | | (112) | % | | |
| Income tax expense | Income tax expense | 1,636 | | | — | | | 1,636 | | | — | % | | 1,901 | | | — | | | 1,901 | | | — | % | Income tax expense | 117 | | | 52 | | | 65 | | | 125 | % | | |
| Net (loss) income | Net (loss) income | (2,178) | | | (9,492) | | | 7,314 | | | (77) | % | | 713 | | | (8,997) | | | 9,710 | | | (108) | % | Net (loss) income | (212) | | | 757 | | | (969) | | | (128) | % | | |
| Net loss attributable to non-controlling interest | Net loss attributable to non-controlling interest | (3,315) | | | — | | | (3,315) | | | — | % | | (424) | | | — | | | (424) | | | — | % | Net loss attributable to non-controlling interest | (93) | | | — | | | (93) | | | — | % | | |
| Net income (loss) attributable to Digital Media Solutions, Inc. | Net income (loss) attributable to Digital Media Solutions, Inc. | $ | 1,137 | | | $ | (9,492) | | | $ | 10,629 | | | (112) | % | | $ | 1,137 | | | $ | (8,997) | | | $ | 10,134 | | | (113) | % | Net income (loss) attributable to Digital Media Solutions, Inc. | $ | (119) | | | $ | 757 | | | $ | (876) | | | (116) | % | | |
Net revenue. Our business generates revenue primarily through the delivery of a variety of performance-based marketing services, including customer acquisition, managed services and software services.
The following table presents revenue by type for each segment and the changes from the prior periods:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | | |
| | 2020 | | 2019 | | $ Change | | % Change | | 2020 | | 2019 | | $ Change | | % Change | | 2021 | | 2020 | | $ Change | | % Change | | |
| Brand Direct | Brand Direct | | | | | | | | | | | | | | | | Brand Direct | | | | | | | | | |
| Customer acquisition | Customer acquisition | $ | 43,921 | | | $ | 41,330 | | | $ | 2,591 | | | 6 | % | | $ | 122,557 | | | $ | 124,173 | | | $ | (1,616) | | | (1) | % | Customer acquisition | $ | 52,901 | | | $ | 38,453 | | | $ | 14,448 | | | 38 | % | | |
| Managed services | Managed services | 5,247 | | | 3,147 | | | 2,100 | | | 67 | % | | 12,885 | | | 10,054 | | | 2,831 | | | 28 | % | Managed services | 3,278 | | | 2,448 | | | 830 | | | 34 | % | | |
| | Total Brand Direct | Total Brand Direct | $ | 49,168 | | | $ | 44,477 | | | $ | 4,691 | | | 11 | % | | $ | 135,442 | | | $ | 134,227 | | | $ | 1,215 | | | 1 | % | Total Brand Direct | $ | 56,179 | | | $ | 40,901 | | | $ | 15,278 | | | 37 | % | | |
| Marketplace | Marketplace | | | | | | | | | | | | | | | | Marketplace | | | | | | | | | |
| Customer acquisition | Customer acquisition | $ | 39,541 | | | $ | 15,542 | | | $ | 23,999 | | | 154 | % | | $ | 108,937 | | | $ | 47,116 | | | $ | 61,821 | | | 131 | % | Customer acquisition | $ | 49,101 | | | $ | 34,178 | | | $ | 14,923 | | | 44 | % | | |
| | Total Marketplace | Total Marketplace | $ | 39,541 | | | $ | 15,542 | | | $ | 23,999 | | | 154 | % | | $ | 108,937 | | | $ | 47,116 | | | $ | 61,821 | | | 131 | % | Total Marketplace | $ | 49,259 | | | $ | 34,178 | | | $ | 15,081 | | | 44 | % | | |
| Other | Other | | | | | | | | | | | | | | | | Other | | | | | | | | | |
| | Managed services | Managed services | $ | 2,045 | | | $ | 562 | | | $ | 1,483 | | | 264 | % | | $ | 2,945 | | | $ | 1,973 | | | $ | 972 | | | 49 | % | Managed services | $ | 510 | | | $ | 450 | | | $ | 60 | | | 13 | % | | |
| Software services | Software services | 830 | | | 790 | | | 40 | | | 5 | % | | 2,430 | | | 2,343 | | | 87 | | | 4 | % | Software services | 1,507 | | | 809 | | | 698 | | | 86 | % | | |
| Total Other | Total Other | $ | 2,875 | | | $ | 1,352 | | | $ | 1,523 | | | 113 | % | | $ | 5,375 | | | $ | 4,316 | | | $ | 1,059 | | | 25 | % | Total Other | $ | 2,017 | | | $ | 1,259 | | | $ | 758 | | | 60 | % | | |
| Corporate and Other | Corporate and Other | | | | | | | | | | | | | | | | Corporate and Other | | |
| Customer acquisition | Customer acquisition | $ | (8,755) | | | $ | (3,796) | | | $ | (4,959) | | | 131 | % | | $ | (19,001) | | | $ | (12,517) | | | $ | (6,484) | | | 52 | % | Customer acquisition | $ | (10,652) | | | $ | (3,610) | | | $ | (7,042) | | | 195 | % | | |
| Total Corporate and Other | Total Corporate and Other | (8,755) | | | (3,796) | | | (4,959) | | | 131 | % | | (19,001) | | | (12,517) | | | (6,484) | | | 52 | % | Total Corporate and Other | $ | (10,652) | | | $ | (3,610) | | | $ | (7,042) | | | 195 | % | | |
| Total Customer acquisition | Total Customer acquisition | 74,707 | | | 53,076 | | | 21,631 | | | 41 | % | | 212,493 | | | 158,772 | | | 53,721 | | | 34 | % | Total Customer acquisition | 91,350 | | | 69,021 | | | 22,329 | | | 32 | % | | |
| Total Managed services | Total Managed services | 7,292 | | | 3,709 | | | 3,583 | | | 97 | % | | 15,830 | | | 12,027 | | | 3,803 | | | 32 | % | Total Managed services | 3,946 | | | 2,898 | | | 1,048 | | | 36 | % | | |
| Total Software services | Total Software services | 830 | | | 790 | | | 40 | | | 5 | % | | 2,430 | | | 2,343 | | | 87 | | | 4 | % | Total Software services | 1,507 | | | 809 | | | 698 | | | 86 | % | | |
| Total Net revenue | Total Net revenue | $ | 82,829 | | | $ | 57,575 | | | $ | 25,254 | | | 44 | % | | $ | 230,753 | | | $ | 173,142 | | | $ | 57,611 | | | 33 | % | Total Net revenue | $ | 96,803 | | | $ | 72,728 | | | $ | 24,075 | | | 33 | % | | |
Customer Acquisition Revenue. Customer acquisition contracts deliver potential consumers or leads (i.e. number of clicks, emails, calls and applications) to the customer in real-time based on predefined qualifying characteristics specified by our customer.
Our Brand Direct segment experienced an increase in Customer acquisition revenue of $2.6$14.4 million, or 6%, and decreased $1.6 million, or 1%38%, during the three and nine months ended September 30, 2020, respectively,March 31, 2021, as compared to the same periodsperiod in 2019.2020. This change was primarily due to growth in our affiliate and performance businesses due to further penetration of existing customers and expansion in the markets, offset by a decrease inlack of sales from our messaging services due to a strategic shift caused by industry disruptions.away from this industry.
Customer acquisition revenue for Marketplace increased by $24.0$15.1 million, or 154%, and $61.8 million, or 131%44%, during the three and nine months ended September 30, 2020, respectively,March 31, 2021, as compared to the same periods in 2019,2020, primarily due to our successful penetration intoof the auto insurance vertical as a result of the acquisitionUE’s performance.
Managed Services Revenue. Managed services contracts provide continuous service of managing the customer’s media spend for the purpose of generating leads through a third-party supplier of leads, as requested by our customer.
Managed services revenue experienced an increase of $3.6$1.0 million, or 97%, and $3.8 million, or 32%36%, during the three and nine months ended September 30, 2020March 31, 2021 as compared to the same periodsperiod in 2019,2020, primarily due to the acquisition of SmarterChaos in July 2020.driven by third-party leads.
Software Services Revenue. Software services contracts provide the customer with continuous, daily access to the Company’s proprietary software. Software services revenue is considered insignificant to our total Net revenue as a whole.
Cost of revenue and gross profit. Cost of revenue primarily includes media and other related costs, such as the cost to acquire user traffic through the purchase of impressions, clicks or actions from publishers or third-party intermediaries, including advertising exchanges, and technology costs that enable media acquisition. These media costs are used primarily to drive user traffic to the Company’s and our customers’ media properties. Cost of revenue also includes indirect costs such as data verification, hosting and fulfillment costs.
The following table presents the gross profit percentage (gross profit as a percentage of total revenue) by segment and the changes from prior period:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | | |
| | 2020 | | 2019 | | % Change | | 2020 | | 2019 | | % Change | | 2021 | | 2020 | | % Change | | |
| Brand Direct | Brand Direct | 23.0 | % | | 25.0 | % | | (8.0) | % | | 24.0 | % | | 25.0 | % | | (4.0) | % | Brand Direct | 27.0 | % | | 24.0 | % | | 12.5 | % | | |
| Marketplace | Marketplace | 30.0 | % | | 40.0 | % | | (25.0) | % | | 31.0 | % | | 38.0 | % | | (18.4) | % | Marketplace | 26.0 | % | | 33.0 | % | | (21.2) | % | | |
| Other | Other | 64.0 | % | | 98.0 | % | | (34.7) | % | | 79.0 | % | | 98.0 | % | | (19.4) | % | Other | 79.0 | % | | 98.0 | % | | (19.4) | % | | |
| Total gross profit percentage | Total gross profit percentage | 30.2 | % | | 32.1 | % | | (5.9) | % | | 30.5 | % | | 32.4 | % | | (5.9) | % | Total gross profit percentage | 28.5 | % | | 31.0 | % | | (8.1) | % | | |
Gross profit for Brand Direct decreasedincreased from 25.0%24.0% to 23.0%27.0% for the three months ended September 30, 2020 and 2019, respectively, and 25.0%March 31, 2021. This margin increase was driven by substantial diversification in our distribution channels as we continue to 24.0% for the ninemonths ended September 30, 2020 and 2019, respectively. This decrease was primarily due to the reduction in messaging services, which had overall higher margins, and the expansion in the performance and network at compressed margins.scale growth.
Gross profit for Marketplace decreased from 40.0%33.0% to 30.0%26.0% for the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and from 38.0% to 31.0% for the ninemonths ended September 30, 2020 and 2019, respectively, primarily due to the expansion in the auto insurance business at compressed margins.
Gross profit for Other decreased from 98.0% to 64.0%79.0% for the three months ended September 30, 2020 and 2019, respectively, and 98.0% to 79.0% for the ninemonths ended September 30, 2020 and 2019, respectively,March 31, 2021 primarily due to the new revenue mix, which has compressed lower profit margins.
Total gross profit decreased from 32.1%31.0% to 30.2%28.5% for the three months ended September 30, 2020 and 2019, respectively, and from 32.4% to 30.5% for the ninemonths ended September 30, 2020 and 2019, respectively.March 31, 2021. This decrease was primarily due to the expansion of performance ad network for our affiliate and auto insurance business, both at compressed margins.
Salaries and related costs. Total compensation includes salaries, commissions, bonuses, payroll taxes and retirement benefits.
Salaries and related costs increased by $1.3$1.9 million, or 19%, and $3.6 million, or 18%23%, for the three and nine months ended September 30, 2020March 31, 2021 as compared to the same periodsperiod in 2019,2020, primarily driven by the increase instock-based compensation and headcount as a result of an expansion of our workforce in the insurance business, as well as an increase in commissions due to the increase in revenue. This increase was partially offset by earnout compensation related to a previous acquisition during the nine months ended September 30, 2019.
Salaries as a percentage of net revenue were 9.5%10.6% and 11.5% for the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively. Salaries as a percentage of net revenue were 10.5% and 11.8% for the nine months ended September 30, 2020 and 2019, respectively.
General and administrative. General and administrative expenses consist of expenses incurred in our normal course of business relating to office supplies, computer and technology, rent and utilities, insurance, legal and professional fees, state and local taxes and licenses, penalties and settlements and bad debt expense, as well as sales and marketing expenses relating to advertising and promotion. We also include other expenses such as investment banking expenses, fundraising costs and costs related to the advancement of our corporate social responsibility program.
General and administrative expenses increased $1.9$5.3 million, or 43%—%, from $4.5$5.3 million for the three months ended September 30, 2019March 31, 2020 to $6.4$7.0 million the three months ended September 30, 2020,March 31, 2021, primarily driven by approximately $1.0$0.8 million of leasesoftware and other expenses related to certain office closurescomputer expense as well as an overall increase in insurance, auditlegal and other compliance costsprofessional fees related to our new public company status,compliance, partially offset by a decline in travel and office expensesrental expense due to COVID-19 restrictions.
General and administrative increased $2.8 million, or 21%, from $13.5 million for the nine months ended September 30, 2019 to $16.4 million for the nine months ended September 30, 2020, due primarily to the reasons noted above as well as an increase in legal and professional fees due to compliance related legal activity, and an increase in our bank service charges due to increased merchant activity.recent office closures.
Acquisition costs. Acquisition related costs are not considered part of the consideration for acquisitions and are expensed as incurred. This includes accretion of contingent consideration, acquisition incentive compensation and other transaction related costs.
Acquisition costs decreasedincreased by $8.5$1.5 million, or 72%, and $14.2 million, or 81%,5433% during the three and ninemonths ended September 30, 2020 as compared to the same periods in 2019.March 31, 2021. The decreaseincrease was primarily due to the acceleration of the earnout of a previous acquisition during the three months ended September 30, 2019, partially offset by acquisitions costs incurred during three months ended September 30, 2020 related to SmarterChaosAimtell, PushPros and Aramis on February 1, 2021, as well as the Business Combination with Leo and otherpreliminary expenses related to Crisp Results acquisition activity.(see Note 17. Subsequent Events).
Depreciation and amortization. Property, plant and equipment consists of computers and office equipment, furniture and fixtures, leasehold improvements and internally developed software costs. Intangible assets subject to amortization include technology, customer relationships, brand, and non-competition agreements.
Depreciation and amortization expense increased $2.4$1.1 million, or 111%26%, and $7.1 million, or 116% during the three and nine months ended September 30, 2020,March 31, 2021, respectively, as compared to the same periodsperiod in 2019,2020, primarily driven by the fixed assets acquired with UEAimtel/Aramis/PushPros (“AAP”) as well as continued investments in internally developed software, which were placed in service.
Interest expense. Interest expense is related primarily to our debt, which carries a variable interest rate based on the three-month LIBOR, or an alternate base rate, plus an agreed upon margin with the Company’s financial institution.
For the three and nine months ended September 30, 2020,March 31, 2021, interest expense was $3.4$3.3 million and $10.7 million, respectively, as compared to $3.0 million and $7.4$3.8 million for the three and nine months ended September 30, 2019, respectively.March 31, 2020. The increasedecrease was primarily due to the increasedecrease in our outstanding debt balance partially offset by theand partial decrease in the interest rate during the three and nine months ended September 30,March 31, 2021 compared to the three months ended March 31, 2020.
Income tax expense. For the three and nine months ended September 30, 2020,March 31, 2021, the Company’s effective income tax rate was 302% and 73%94%, respectively, as compared to 0% for the three and nine months ended September 30, 2019.March 31, 2020. The blended effective tax rate for the three and nine months ended September 30, 2020March 31, 2021 was 74.2%94% , which varies from our statutory U.S. tax rate due to the tax impact of the taxable income or loss that is allocated to the non-controlling interest.
Non-controlling interest. As a result of the Business Combination and the SmarterChaos acquisition, our non-controlling interest owns approximately 44.8%43.8% of the ownership interest of DMSH and we allocate the respective portion of net income or loss to the DMSH Units held by the non-controlling interest. Refer to Note 2. Business Combination and Note 9.10. Equity in the Notes to Unaudited Condensed Consolidated Financial Statements, included in Item 1. Financial Statements of this report, for a more detailed discussion on the non-controlling interest and the Business Combination.
NON-GAAP FINANCIAL MEASURES
FinancialIn addition to providing financial measurements based on accounting principles generally accepted in the United States of America (“GAAP”), this earnings press release includes additional financial measures that are not U.S. GAAP should not be considered as alternatives to operating income, cash flows from operating activities or any other performance measures derivedprepared in accordance with GAAP as(“non-GAAP”), including adjusted revenue, adjusted EBITDA, unlevered free cash flow, adjusted net income and adjusted EPS. A reconciliation of non-GAAP financial measures of operatingto the most directly comparable GAAP financial measures can be found below. As explained further below, we use these financial measures internally to review the performance or cash flows as measures of liquidity. These measures have important limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our business units without regard to certain accounting treatments and non-recurring items. We believe that presentation of these non-GAAP financial measures provides useful information to investors regarding our results as reported under GAAP.of operations. Because of these limitations, management relies primarily on its GAAP results and uses Adjusted EBITDA, Combined Adjusted EBITDA, Unlevered Free Cash Flow, Unlevered Free Cash Flow Conversion and Adjusted revenuenon-GAAP measures only as a supplement.
Adjusted Revenue
Adjusted revenue presentsis a non-GAAP financial information and should not be considered a measure of financial performance under GAAP. These measures are presented as an alternative method for assessing the Company’s operating results in a manner that is focused on the performance of our underlying operations. Management believes this measure provides useful information because, while the majority of our business is comprisedconsists of lead generation contracts which are accounted for on a gross basis, a portion of our agency managed services contracts are accounted for on a net basis. In light of these considerations, management believes that Adjusted Revenueadjusted revenue provides useful information regarding operating performance across our business, without regard to the accounting treatment of individual contracts, and allows management to build forecasts on a consistent basis across the business. Management further uses Adjusted Revenueadjusted revenue to compare the performance of divisions within the Company against each other and to isolate our core operating performance. Moreover, management expects that over time we will transition all of our services to a principal relationship and as our contracts are either amended or new agreements are executed, this measure will help provide a basis for comparison of our business operations between different periods over time as we transition these services and related accounting for these contracts.
Adjusted Revenuerevenue is defined as revenue as reported under GAAP, without regard to netting of costs applicable to revenues earned under contracts that are deemed to be entered into on an agency basis.
The following table provides a reconciliation of Adjusted Revenue to revenue, the most directly comparable GAAP measure (in thousands):
| | | Three Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 | | Three Months Ended March 31, 2021 | | |
| | Reported
(GAAP) | | Adjustments (1) | | Adjusted
(Non-GAAP) | | Reported
(GAAP) | | Adjustments (1) | | Adjusted
(Non-GAAP) | | Reported
(GAAP) | | Adjustments (1) | | Adjusted
(Non-GAAP) | | |
| Net revenue | Net revenue | $ | 82,829 | | | $ | 2,307 | | | $ | 85,136 | | | $ | 230,753 | | | $ | 5,700 | | | $ | 236,453 | | Net revenue | $ | 96,803 | | | $ | 2,735 | | | $ | 99,538 | | | |
| Cost of revenue | Cost of revenue | 57,777 | | | 2,307 | | | 60,084 | | | 160,338 | | | 5,700 | | | 166,038 | | Cost of revenue | 69,182 | | | 2,735 | | | 71,917 | | | |
| Gross profit | Gross profit | $ | 25,052 | | | $ | — | | | $ | 25,052 | | | $ | 70,415 | | | $ | — | | | $ | 70,415 | | Gross profit | $ | 27,621 | | | $ | — | | | $ | 27,621 | | | |
| Gross profit margin | Gross profit margin | 30.2 | % | | — | % | | 29.4 | % | | 30.5 | % | | — | % | | 29.8 | % | Gross profit margin | 28.5 | % | | — | % | | 27.7 | % | | |
(1) Includes the gross up for certain Managed services contracts that are presented net of costs under GAAP for the three and nine months ended September 30, 2020.March 31, 2021.
Unlevered Free Cash Flow
Adjusted EBITDA, Combined Adjusted EBITDA, Unlevered Free Cash Flow and Unlevered Free Cash Flow Conversion are
We use the non-GAAP financial measures of adjusted EBITDA and are presented because managementunlevered free cash flow to assess operating performance. Management believes that theythese measures provide useful information to investors regarding ourDMS’s operating performance and its capacity to incur and service debt and fund capital expenditures. ManagementDMS believes that these measures are used by many investors, analysts and rating agencies as a measure of performance. By reporting these measures, the CompanyDMS provides a basis for comparison of our business operations between current, past and future periods by excluding items that managementDMS does not believe are indicative of our core operating performance. Financial measures that are non-GAAP should not be considered as alternatives to operating income, cash flows from operating activities or any other performance measures derived in accordance with GAAP as measures of operating performance, or cash flows as measures of liquidity. These measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, DMS relies primarily on its GAAP results and uses adjusted EBITDA and unlevered free cash flow only as a supplement.
Adjusted EBITDA, a measure used by management to assess operating performance, is defined as net income (loss), excluding (1) interest expense, (2) income tax expense, (3) depreciation and amortization, (4) acquisition costs, (5) other expenses, and (6) other non-recurring, infrequent or unusual costs. Ancosts (An item is considered to be non-recurring, infrequent or unusual if it is unlikely that it will recur in the next two years or if a similar charge or gain has not occurred in the preceding two years, in accordance with SEC rules.
Combined Adjusted EBITDA is defined as Adjusted EBITDA, adjusted for (1)); (7) future expectedestimated cost savings resulting primarily from the reorganization of the W4 Performance Ad Network (“PAN”) within our Brand Direct segment,acquisitions, including adjustments to headcount, during the year ended December 31, 2019, as well as other operational synergies, (2)(8) future expected UE and SmarterChaosestimated technology synergies and cost savings due to the use of an alternative vendor, (3)(9) future expectedestimated costs savings resulting primarily from acquisitions as well as reorganization of UE such as staff adjustments, use of lower cost distribution vendors, amongst others, and (4) UE(10) Aimtell EBITDA from January 1, 20192021 through January 31, 2021, the date of the acquisition.
Unlevered Free Cash Flowfree cash flow is defined as Combined Adjustedadjusted EBITDA, less capital expenditures, and Unlevered Free Cash Flow Conversionunlevered free cash flow conversion is defined as Unlevered Free Cash Flowunlevered free cash flow divided by Combined Adjustedadjusted EBITDA.
The following table provides a reconciliation of Adjusted EBITDA, Combined Adjusted EBITDA and Unlevered Free Cash Flow from net income the most directly comparable GAAP measure (in thousands)(in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | |
| Net income (loss) | Net income (loss) | $ | (2,178) | | | $ | (9,492) | | | $ | 713 | | | $ | (8,997) | | Net income (loss) | $ | (212) | | | $ | 757 | | | |
| Adjustments | Adjustments | | Adjustments | | |
| Interest expense | Interest expense | 3,421 | | | 2,980 | | | 10,702 | | | 7,389 | | Interest expense | 3,257 | | | 3,790 | | | |
| Income tax expense | Income tax expense | 1,636 | | | — | | | 1,901 | | | — | | Income tax expense | 117 | | | 52 | | | |
| Depreciation and amortization | Depreciation and amortization | 4,636 | | | 2,201 | | | 13,307 | | | 6,165 | | Depreciation and amortization | 5,419 | | | 4,315 | | | |
| Acquisition costs (1) | Acquisition costs (1) | 3,248 | | | 11,707 | | | 3,322 | | | 17,492 | | Acquisition costs (1) | 1,494 | | | 27 | | | |
| Other expenses (2) | Other expenses (2) | 745 | | | 249 | | | 1,373 | | | 949 | | Other expenses (2) | 2,253 | | | 133 | | | |
| Other non-recurring expenses (3) | Other non-recurring expenses (3) | 1,237 | | | 824 | | | 1,692 | | | 1,911 | | Other non-recurring expenses (3) | 554 | | | 348 | | | |
| Adjusted EBITDA | $ | 12,745 | | | $ | 8,469 | | | $ | 33,010 | | | $ | 24,909 | | |
| Adjustments | | | | | | | | |
| Subtotal before additional adjustments | | Subtotal before additional adjustments | $ | 12,882 | | | $ | 9,422 | | | |
| Additional Adjustments | | Additional Adjustments | | | | | |
| Pro forma cost savings (4) | Pro forma cost savings (4) | $ | 47 | | | $ | 412 | | | $ | 1,017 | | | $ | 1,809 | | Pro forma cost savings (4) | $ | 31 | | | $ | 675 | | | |
| Technology synergies (5) | Technology synergies (5) | 572 | | | 779 | | | 2,106 | | | 2,337 | | Technology synergies (5) | 192 | | | 779 | | | |
| Pro forma cost savings (6) | Pro forma cost savings (6) | 671 | | | 1,086 | | | 2,703 | | | 3,801 | | Pro forma cost savings (6) | 577 | | | 1,372 | | | |
Acquisitions EBITDA (8)(7) | Acquisitions EBITDA (8)(7) | 9 | | | 2,812 | | | 400 | | | 8,568 | | Acquisitions EBITDA (8)(7) | 422 | | | 1,126 | | | |
| Combined Adjusted EBITDA | $ | 14,044 | | | $ | 13,558 | | | $ | 39,236 | | | $ | 41,424 | | |
| Adjusted EBITDA | | Adjusted EBITDA | $ | 14,104 | | | $ | 13,374 | | | |
| Capital expenditures | Capital expenditures | $ | 2,450 | | | $ | 1,790 | | | $ | 7,481 | | | $ | 4,566 | | Capital expenditures | $ | 2,498 | | | $ | 2,976 | | | |
| Unlevered Free Cash Flow | Unlevered Free Cash Flow | $ | 11,594 | | | $ | 11,768 | | | $ | 31,755 | | | $ | 36,858 | | Unlevered Free Cash Flow | $ | 11,606 | | | $ | 10,398 | | | |
| Unlevered Free Cash Flow Conversion | Unlevered Free Cash Flow Conversion | 83 | % | | 87 | % | | 81 | % | | 89 | % | Unlevered Free Cash Flow Conversion | 82 | % | | 78 | % | | |
______________
(1)Balance includes acquisition incentive payments, contingent consideration accretion, earnout paymentsIncludes pre-acquisition transactions related to travel, professional and pre-acquisition expenses.
(2)Balance includes legal fees associated with acquisitions,for recent acquisitions.
(2) Includes primarily stock-based compensation, investor management fees, director fees and costs related to philanthropic initiatives.
(3)Restructuring Other non-recurring expenses include, restructuring costs includeand lease termination costs due to office closures, severance and commission payments due to company reorganization, write-off of equity investment, payments on Company’s EIP and business combination transaction fees.reorganization.
(4)These proformaare estimated cost savings include expected cost savings resulting primarily from reorganization of the company.
(5)These are annualized future expectedestimated UE Authority, Co. (“UE”) technology synergies related to uniform infrastructure platform.
(6)These are annualized expectedestimated cost savings resulting primarilysynergies from reorganization ofthe UE, SmarterChaos.com, and SmarterChaos.Aimtell acquisitions.
(7)Acquisitions Includes pre-acquisition Aimtell EBITDA includes UE and SmarterChaos from June 30, 2019 through September 30, 2019 forduring the three months ended September 30, 2019,March 31, 2021 and SmarterChaos from June 30, 2020 to July 16, 2020 (acquisition date) forcomparable pro forma amounts during the three months ended September 30,same period in 2020.
(8)Acquisitions EBITDA includes UE and SmarterChaos from January 1, 2019 through September 30, 2019 for the nine months ended September 30, 2019, and SmarterChaos from January 1, 2020 to July 16, 2020 (acquisition date) for the nine months ended September 30, 2020.
A reconciliation of Unlevered Free Cash Flow to net cash provided by operating activities, the most directly comparable GAAP measure, is presented below (in(in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | |
| Unlevered Free Cash Flow | Unlevered Free Cash Flow | $ | 11,594 | | | $ | 11,768 | | | $ | 31,755 | | | $ | 36,858 | | Unlevered Free Cash Flow | $ | 11,713 | | | $ | 10,398 | | | |
| Capital expenditures | Capital expenditures | 2,450 | | | 1,790 | | | 7,481 | | | 4,566 | | Capital expenditures | 2,391 | | | 2,976 | | | |
| Combined Adjusted EBITDA | 14,044 | | | 13,558 | | | 39,236 | | | 41,424 | | |
| Adjusted EBITDA | | Adjusted EBITDA | $ | 14,104 | | | $ | 13,374 | | | |
Acquisitions EBITDA (2)(1) | Acquisitions EBITDA (2)(1) | 9 | | | 2,812 | | | 400 | | | 8,568 | | Acquisitions EBITDA (2)(1) | 422 | | | 1,126 | | | |
Pro forma cost savings (3)(2) | Pro forma cost savings (3)(2) | 671 | | | 1,086 | | | 2,703 | | | 3,801 | | Pro forma cost savings (3)(2) | 577 | | | 1,372 | | | |
Technology synergies (4)(3) | Technology synergies (4)(3) | 572 | | | 779 | | | 2,106 | | | 2,337 | | Technology synergies (4)(3) | 192 | | | 779 | | | |
Pro forma cost savings (5)(4) | Pro forma cost savings (5)(4) | 47 | | | 412 | | | 1,017 | | | 1,809 | | Pro forma cost savings (5)(4) | 31 | | | 675 | | | |
| Adjusted EBITDA | 12,745 | | | 8,469 | | | 33,010 | | | 24,909 | | |
| Subtotal before additional adjustments | | Subtotal before additional adjustments | $ | 12,882 | | | $ | 9,422 | | | |
Other non-recurring expenses (6)(5) | Other non-recurring expenses (6)(5) | 1,237 | | | 824 | | | 1,692 | | | 1,911 | | Other non-recurring expenses (6)(5) | 554 | | | 348 | | | |
Other expenses (7)(6) | Other expenses (7)(6) | 745 | | | 249 | | | 1,373 | | | 949 | | Other expenses (7)(6) | 2,253 | | | 133 | | | |
Acquisition costs (8)(7) | Acquisition costs (8)(7) | 3,248 | | | 11,707 | | | 3,322 | | | 17,492 | | Acquisition costs (8)(7) | 1,494 | | | 27 | | | |
| EBITDA | 7,515 | | | (4,311) | | | 26,623 | | | 4,557 | | |
| Subtotal before additional adjustments | | Subtotal before additional adjustments | $ | 8,581 | | | $ | 8,914 | | | |
| | Provision for bad debt | | Provision for bad debt | (351) | | | 143 | | | |
| Lease restructuring charges | | Lease restructuring charges | 1,365 | | | — | | | |
| Stock-based compensation | | Stock-based compensation | (3,257) | | | — | | | |
| Interest expense | Interest expense | (3,421) | | | (2,980) | | | (10,702) | | | (7,389) | | Interest expense | (117) | | | (3,790) | | | |
| Income tax expense | Income tax expense | (1,636) | | | — | | | (1,901) | | | — | | Income tax expense | — | | | (52) | | | |
| Payment of contingent consideration | Payment of contingent consideration | — | | | (4,945) | | | (1,000) | | | (2,063) | | Payment of contingent consideration | 233 | | | (1,000) | | | |
| Amortization of debt issuance costs | Amortization of debt issuance costs | 228 | | | 169 | | | 699 | | | 409 | | Amortization of debt issuance costs | (1,016) | | | 280 | | | |
| Deferred income tax provision, net | Deferred income tax provision, net | (277) | | | — | | | (1,261) | | | — | | Deferred income tax provision, net | (1,069) | | | (490) | | | |
| Change in accounts receivable, net | Change in accounts receivable, net | (5,486) | | | 3,104 | | | (7,686) | | | (1,889) | | Change in accounts receivable, net | 367 | | | (4,870) | | | |
| Change in prepaid expenses and other current assets | Change in prepaid expenses and other current assets | 3,614 | | | 109 | | | (495) | | | (837) | | Change in prepaid expenses and other current assets | (5,703) | | | (1,188) | | | |
| Change in accounts payable and accrued expenses | Change in accounts payable and accrued expenses | 3,286 | | | (3,101) | | | 3,210 | | | (3,680) | | Change in accounts payable and accrued expenses | — | | | 3,174 | | | |
| Change in other liabilities | Change in other liabilities | (164) | | | (46) | | | (136) | | | (131) | | Change in other liabilities | (24) | | | (12) | | | |
| Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | $ | 3,659 | | | $ | (12,001) | | | $ | 7,351 | | | $ | (11,023) | | Net cash provided by (used in) operating activities | $ | 552 | | | $ | 1,109 | | | |
______________
(1)Acquisitions Includes pre-acquisition Aimtell EBITDA includes UE and SmarterChaos from June 30, 2019 through September 30, 2019 forduring the three months ended September 30, 2019,March 31, 2021 and SmarterChaos from June 30, 2020 to July 16, 2020 (acquisition date) forcomparable pro forma amounts during the three months ended September 30,same period in 2020.
(2)Acquisitions EBITDA includesThese are annualized estimated cost synergies from the UE, SmarterChaos.com, and SmarterChaos from January 1, 2019 through September 30, 2019 for the nine months ended September 30, 2019, and SmarterChaos from January 1, 2020 to July 16, 2020 (acquisition date) for the nine months ended September 30, 2020.Aimtell acquisitions.
(3)These are annualized expected cost savings resulting primarily from reorganization ofestimated UE and SmarterChaos.
(4)These are annualized future expected UEAuthority, Co. (“UE”) technology synergies related to uniform infrastructure platform.
(5)(4)These proformaare estimated cost savings include expected cost savings resulting primarily from reorganization of the Company.company.
(6)(5)RestructuringOther non-recurring expenses include, restructuring costs includeand lease termination costs due to office closure,closures, severance and commission payments due to company reorganization, write-off of equity investment, payments on the Company’s EIP and business combination transaction fees.reorganization.
(7)(6)Balance includes legal fees associated with acquisitions,Includes primarily stock-based compensation, investor management fees, director fees and costs related to philanthropic initiatives.
(8)(7)Balance includesIncludes pre-acquisition transactions related to travel, professional and legal fees for recent acquisitions.
Adjusted Net Income and Adjusted EPS:
We use the non-GAAP measures adjusted net income and adjusted EPS to assess operating performance. Management believes that these measures provide investors with useful information on period-to-period performance as evaluated by management and comparison with our past financial and operating performance. Management also believes these non-GAAP financial measures are useful in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain items that may vary from company to company for reasons unrelated to overall operating performance. We define adjusted net income (loss) as net income (loss) attributable to Digital Media Solutions, Inc. adjusted for (x) costs associated with the Business Combination, acquisition-related costs, equity based compensation and lease restructuring charges and (y) the reallocation of net income (loss) attributable to non-controlling interests from the assumed acquisition incentive payments, contingent consideration accretion, earnout paymentsby Digital Media Solutions, Inc. of all units of Digital Media Solutions Holdings, LLC ("DMSH LLC") (other than units held by subsidiaries of Digital Media Solutions, Inc.) for newly-issued shares of Class A common stock of Digital Media Solutions, Inc. on a one-to-one basis. We define adjusted pro forma net loss per share as adjusted pro forma net loss divided by the weighted-average shares of Class A common stock outstanding, assuming the acquisition by Digital Media Solutions, Inc. of all outstanding DMSH LLC units (other than units held by subsidiaries of Digital Media Solutions, Inc.) for newly-issued shares of Class A common stock on a one-to-one-basis.
The following table presents a reconciliation between GAAP Earnings Per Share and pre-acquisition expenses.Non-GAAP Adjusted Net Income and Adjusted EPS (In thousands, except per share data):
| | | | | | | | | | | | | | |
| | Three Months Ended
March 31, 2021 | | Three Months Ended
March 31, 2020 |
| Numerator: | | | | |
| Net income (loss) | | $ | (212) | | | $ | 757 | |
| Less: Net income attributable to non-controlling interests subsequent to the Business Combination | | (93) | | | — | |
| Net income attributable to DMS Inc. | | (119) | | | 757 | |
| Denominator: | | | | |
| Weighted-average shares of Class A Common Stock outstanding - basic and diluted | | 33,241 | | | N/A |
| | | | |
| Earnings per share of Class A Common Stock - basic and diluted | | $ | — | | | N/A |
| | | | | | | | | | | | | | |
| Three Months Ended
March 31, 2021 | | Three Months Ended
March 31, 2020 | |
| Numerator: | | | | |
| Net income (loss) attributable to Digital Media Solutions, Inc.; | $ | (119) | | | $ | 757 | | |
| Add adjustments to net income (loss): | | | | |
| Acquisition costs | 1,494 | | | 27 | | |
| Equity based compensation, legal and severance costs | 2,253 | | | 133 | | |
| Restructuring,transition and refinance costs | 554 | | | 348 | | |
| Acquisition synergies | 800 | | | 2,826 | | |
| Acquisition EBITDA | 422 | | | 1,126 | | |
| $ | 5,404 | | | $ | 5,217 | | |
| Net income tax benefit (expense) based on conversion of units | 144 | | | 121 | | |
| Adjusted net income (loss) | $ | 5,678 | | | $ | 4,917 | | |
| Denominator: | | | | |
| Weighted-average shares outstanding - basic and diluted | | | | |
| Class A common stock | 33,241 | | | 23,960 | | |
| Weighted-average LLC Units of Digital Media Solutions Holdings, LLC that are convertible into Class A common stock | 26,306 | | | 20,500 | | |
| 59,547 | | | 44,460 | | |
| Adjusted EPS | $ | 0.09 | | | $ | 0.11 | | |
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes certain key measures of our liquidity and capital resources (in thousands):
| | | September 30,
2020 | | December 31,
2019 | | $ Change | | % Change | | March 31,
2021 | | December 31,
2020 | | $ Change | | % Change |
| Cash | Cash | $ | 24,500 | | | $ | 3,008 | | | $ | 21,492 | | | 714 | % | Cash | $ | 23,866 | | | $ | 31,397 | | | $ | (7,531) | | | (24) | % |
| Availability under revolving credit facility | Availability under revolving credit facility | $ | 6,486 | | | $ | 2,500 | | | $ | 3,986 | | | 159 | % | Availability under revolving credit facility | $ | 11,000 | | | $ | 15,000 | | | $ | (4,000) | | | (27) | % |
| Total Debt | Total Debt | $ | 201,209 | | | $ | 205,198 | | | $ | (3,989) | | | (2) | % | Total Debt | 201,987 | | | 203,851 | | | $ | (1,864) | | | (1) | % |
Our capital sources are focused on investments in our technology solutions, corporate infrastructure and strategic acquisitions to further expand into new business sectors and/or expand sales in existing sectors. We generate sufficient cash flows for working capital and expect to do so for the foreseeable future.
Our principal sources of liquidity on a short-term basis are cash and cash equivalents, and cash flows provided by operations. Our primary use of cash is compensation to our employees and payments for general operating expenses and interest expense as well as distribution payments.expense. During the nine monthsyear ended September 30,December 31, 2020, we increased the capacity on our revolving commitment and borrowed the remaining availability as a precautionary measure to reinforce our cash position and preserve financial flexibility in light of the current uncertainty in the global economy resulting from the COVID-19 pandemic.
For the ninethree months ended September 30, 2020March 31, 2021 and the ninethree months ended September 30, 2019,March 31, 2020, our Unlevered Free Cash Flow conversion rate was 81%83% and 89%78%, respectively. The declineincrease was due to our increase in non-recurring investment in capital expenditure as a result of the consolidation of our software development platforms.lower expected UE and SmarterChaos synergies and management proforma adjustments.
On July 15, 2020, the Company completed its Business Combination with Leo, and in accordance with the terms of the Business Combination Agreement, DMS received $40.0 million in cash and paid $10.0 million on the Monroe Facility.
Cash flows from operating activities
Net cash provided by operating activities was $7.4$1.2 million for the ninethree months ended September 30, 2020March 31, 2021 as compared to $11.0$1.1 million usedprovided by in the ninethree months ended September 30, 2019.March 31, 2020. The increase isin comparable cash provided by operating activities was primarily due to continued growth of the acquisitionbusiness and payments of UE in November 2019 as well asaccrued expenses offset by stock-based compensation and the payout of the earnout compensation related to a previous acquisition of UE Authority, Co. during in the three and nine months ended September 30, 2019.March 31, 2020.
Cash flows from investing activities
Net cash used in investing activities for the ninethree months ended September 30, 2020March 31, 2021 increased by $5.7$3.9 million, or 124%130% to $10.3$6.8 million from $4.6$3.0 million for the ninethree months ended September 30, 2019March 31, 2020 primarily due to the recent acquisition of SmarterChaosAimtell/Aramis/PushPros and increasedcontinued investments in internally developed software.
Cash flows from financing activities
Net cash provided byused in financing activities for the ninethree months ended September 30, 2020March 31, 2021 was $24.4$(1.9) million, reflecting an increasea decrease of $12.5$(10.6) million, or 105%121%, as compared to $11.9$8.8 million for the ninethree months ended September 30, 2019.March 31, 2020. This increasedecrease was mainly due to borrowings on revolving credit facilities during the net proceeds from the Business Combination.period ended March 31, 2020.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. In addition, we do not engage in trading activities involving non-exchange traded contracts. In our ongoing business, we do not enter into transactions involving, or otherwise form relationships with, unconsolidated entities or financial partnerships that are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
SUMMARY OF CONTRACTUAL OBLIGATIONS
In accordance with the termsThe following table presents our expected future contractual obligations as of certain business acquisitions, we made final contingent consideration payments of $1.0 million and a final earnout payment of $3.0 million related to a previous acquisition during the nine months ended September 30, 2020 and have no contingent consideration obligations at September 30, 2020.
At September 30, 2020, the future minimum lease payments for the Company were comprised of the followingMarch 31, 2021 (in thousands):
| | | | | |
| 2020 | $ | 595 | |
| 2021 | 2,040 | |
| 2022 | 1,941 | |
| 2023 | 1,806 | |
| 2024 | 1,304 | |
| Thereafter | 425 | |
| Total | $ | 8,111 | |
| | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Contractual Obligations | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years |
| Monroe Credit Facility (1) | $ | 201,987 | | $ | 7,141 | | $ | 8,000 | | $ | 186,846 | | $ | — | |
| Notes payable- insurance premium | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| Operating leases (2) | $ | 7,432 | | $ | 1,562 | | $ | 5,466 | | $ | 404 | | $ | — | |
| Purchase obligations (3) | $ | 10,931 | | $ | 5,200 | | $ | 5,731 | | $ | — | | $ | — | |
| | | | | |
| Total | $ | 220,350 | | $ | 13,903 | | $ | 19,197 | | $ | 187,250 | | $ | — | |
(1) Our credit facility matures July 2023. Our interest rate as of March 31, 2021 was used to forecast the expected future interest rate payments. These payments are inherently uncertain due to fluctuations in interest rates and outstanding borrowings that will occur over the remaining term of the credit facility.
(2) Management analyzed our current leases due to the COVID-19 economic environment and recorded a reserve of approximately $1.0 million as a result of the cease of use of certain leased properties, which was included in General$3.0 million as of March 31, 2021.
(3) Purchase obligations include agreements to purchase goods and administrative expenses in the unaudited condensed consolidated statements of operations during the threeservices that are enforceable, legally binding and nine months ended September 30, 2020.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have prepared our consolidated financial statements in accordance with GAAP. In doing so, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenue and expenses during the reporting period. Actual results could differ significantly from these estimates. A number of the estimates and assumptions relate to matters that are inherently uncertain as they pertain to future events. We base these estimates and assumptions on historical experience or on various other factors that we believe to be reasonable and appropriate under the circumstances. On an ongoing basis, we reconsider and evaluate our estimates and assumptions.
We believe that the accounting policies listed below involve our more significant judgments, estimates and assumptions and, therefore, could have the greatest potential impact on our consolidated financial statements. In addition, we believe that a discussion of these policies is necessary to understand and evaluate the consolidated financial statements included in this report.Quarterly Report.
Refer to Note 2.1. Summary of Significant Accounting Policies in the Notes to Unaudited Condensed Consolidated Financial Statements, included in Item 1. Financial Statements of this report,Quarterly Report, for further information on our critical and other significant accounting policies.
Revenue recognition
The Company derives revenue primarily from fees earned through the delivery of various types of services, including: customer acquisition, managed servicesqualified clicks, leads, inquiries, calls, applications, customers and, software services. Effective January 1, 2019, the Company adopted the new revenue recognition standard using the modified retrospective method. The adoption of this new standard did not haveto a material impact on the measurement, recognition and disclosure of revenue in the Company’s unaudited condensed consolidated financial statements.
lesser extent, display advertisements, or impressions. The Company recognizes revenue when the Company transfers promised goods or services to customersclients in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company recognizes revenue pursuant to the five-step framework:framework contained in ASC 606, Revenue from Contracts with Customers: (i) identify the contract with a customer;client; (ii) identify the performance obligations in the contract, including whether they are distinct in the context of the contract; (iii) determine the transaction price, including anythe constraint on variable consideration; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligations.
As part of determining whether a contract exists, probability of collection is assessed on a client-by-client basis at the outset of the contract. Clients are subjected to a credit review process that evaluates the clients’ financial position and the ability and intention to pay. If it is determined from the outset of an arrangement that the client does not have the ability or intention to pay, the Company will conclude that a contract does not exist and will continuously reassess its evaluation until the Company is able to conclude that a contract does exist.
Generally, the Company’s contracts specify the period of time as one month, but in some instances the term may be longer. However, for most of the Company’s contracts with clients, either party can terminate the contract at any time without penalty. Consequently, enforceable rights and obligations only exist on a day-to-day basis, resulting in individual daily contracts during the specified term of the contract or until one party terminates the contract prior to the end of the specified term.
The transactionCompany has assessed the services promised in its contracts with clients and has identified one performance obligation, which is a series of distinct services. Depending on the client’s needs, these services consist of a specified number or an unlimited number of clicks, leads, calls, applications, customers, etc. (hereafter collectively referred to as “marketing results”)
to be delivered over a period of time. The Company satisfies these performance obligations over time as the services are provided. The Company does not promise to provide any other significant goods or services to its clients.
Transaction price is measured based on the consideration that the Company expects to receive from a contract with a customer and for which it is probable the Company will collect substantially all of the consideration to which it is entitled under the contract.client. The Company’s contracts with customersclients contain variable consideration; however, uncertainty related to variable consideration is resolvedas the price for an individual marketing result varies on a monthly basis.day-to-day basis depending on the market-driven amount a client has committed to pay. However, because the Company ensures the stated period of its contracts does not generally span multiple reporting periods, the contractual amount within a period is based on the number of marketing results delivered within the period. Therefore, the transaction price for any given period is fixed and no estimation of variable consideration is required (except as discussedrequired.
If a marketing result delivered to a client does not meet the contractual requirements associated with that marketing result, the Company’s contracts allow for clients to return a marketing result generally within 5-10 days of having received the Customer Acquisition subsection).marketing result. Such returns are factored into the amount billed to the client on a monthly basis and consequently result in a reduction to revenue in the same month the marketing result is delivered. No warranties are offered to the Company’s clients.
The Company’s standard payment terms are typically 30 days.
The Company does not have any significant financing components.
If a customer pays consideration beforeallocate transaction price as the Company’sCompany has only one performance obligationsobligation and its contracts do not generally span multiple periods. Taxes collected from clients and remitted to governmental authorities are satisfied, such amounts are recorded as a contract liability (i.e., deferred revenue) on the unaudited condensed consolidated balance sheets.
not included in revenue. The Company elected to use the practical expedient which allows the Company to record costs to obtain a contract (i.e. sales commissions)commissions as expense as incurred when the amortization period would have been one year or less. Costs to fulfill a contract, including nominal configuration costs, are not material.
The Company electedbills clients monthly in arrears for the practical expedient tomarketing results delivered during the preceding month. The Company’s standard payment terms are 30-60 days. Consequently, the Company does not disclosehave significant financing components in its arrangements.
Separately from the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to whichagreements the Company has with clients, the rightCompany has agreements with Internet search companies, third-party publishers and strategic partners that we engage with to invoicegenerate targeted marketing results for its clients. The Company receives a fee from its clients and separately pays a fee to the Internet search companies, third-party publishers and strategic partners. Other than certain of its managed services performed.arrangements, the Company is the principal in the transaction. For the transactions where the Company is the principal, the fees paid by its clients are recognized as revenue and the fees paid to its Internet search companies, third-party publishers and strategic partners are included in cost of revenue.
Customer acquisition
The Company’s performance obligation for Customer acquisition contracts is to deliver an unspecified number of potential customers or leads (i.e., number of clicks, emails, calls and applications) to the customer in real-time, on a daily basis as the leads are generated, based on predefined qualifying characteristics specified by our customer. The contracts generally have a one-month term and the Company has an enforceable right to payment for all leads delivered to the customer. The Company’s customers simultaneously receive and consume the benefits provided, as the Company satisfies its performance obligations. The Company recognizes revenue as the performance obligations are satisfied over time.
When there is a delay between the period in which revenue is recognized and when a customer invoice is issued, revenue is recognized and the corresponding amounts are recorded as unbilled revenue (i.e., contract assets) within Accounts receivable, net on the unaudited condensed consolidated balance sheets. In line with industry practice, the Company applies the constraint on variable consideration and records revenue based on internally tracked conversions (leads delivered), net of the amount tracked and subsequently confirmed by customers. Substantially all amounts included within the unbilled revenue balance are invoiced to customers within the month directly following the period of service. Historical estimates related to unbilled revenue have not been materially different from actual revenue billed.
Managed services
The Company’s performance obligation for Managed service contracts is to provide continuous service of managing the customer’s media spend for the purpose of generating leads through a third-party supplier of leads, as requested by our customer. Each month of service is distinct, and any variable consideration is allocated to a distinct month. Therefore, revenue is recognized as the performance obligation is satisfied each month and there is no estimation of revenue required at each reporting period for managed services contracts.
The Company enters into agreements with internetInternet search companies, third-party publishers and/or strategic partners to generate customer acquisition services for their Managed service customers. The Company receives a fee from its customers and separately pays a fee to the internetInternet search companies, third-party publishers and/or strategic partners. The third-party supplier is primarily responsible for the performance and deliverable to the customer, and the Company solely arranges for the third-party supplier to provide services to the customer. Therefore, in certain cases, the Company acts as the agent and the net fees earned by the Company are recorded as revenue, with no associated costs of revenue attributable to the Company.
Software services
The Company’s performance obligation for Software services contracts is to provide the customer with continuous, daily access to the Company’s proprietary software. Service provided each month is distinct, and any variable consideration is allocated to a distinct month. Therefore, revenue is recognized as the performance obligations are satisfied each month and there is no estimation of revenue required at each reporting period for Software services contracts.
Cost of revenue
Cost of revenue primarily includes media and related costs, which consist of the cost to acquire traffic through the purchase of impressions, clicks or actions from publishers or third-party intermediaries, such as advertising exchanges, and technology costs that enable media acquisition. These media costs are used primarily to drive user traffic to the Company’s and its clients’ media properties. Cost of revenue additionally consists of indirect costs such as data verification, hosting and fulfillment costs. Cost of revenue is presented exclusive of depreciation and amortization expenses, as well as salaries and related costs.
Cash and cash equivalents
The Company considers highly liquid securities and other investments purchased with an original or remaining maturity of three months or less at the date of the purchase to be cash equivalents. The Company’s cash is primarily held as cash deposits with no cash restrictions at retail and commercial banks.
Accounts receivable, net
Accounts receivables are recorded net of the allowance for doubtful accounts. Management determines the allowance for doubtful accounts based on factors including past write-offs and delinquency trends and current credit conditions. Accounts are written off when management determines that collection is unlikely. As of March 31, 2021 and 2020, the allowance for doubtful accounts was $3.5 million and $3.1 million, respectively, and bad debts expense was $0.4 million and $0.1 million for the three months ended March 31, 2021 and 2020, respectively.
Property and equipment, net
Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Property and equipment consist of computer and office equipment, furniture and fixtures and leasehold improvements, which are depreciated on a straight-line basis over the estimated useful lives of the assets.
Management regularly assesses the carrying value of its long-lived assets to be held and used, including property and equipment, for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. If such events or circumstances are present, a loss is recognized to the extent the carrying value of the asset is in excess of estimated fair value.
Software development costs
Costs for software developed for internal use are capitalized as Property and equipment on the Consolidated Balance Sheets during the preliminary stage and post-implementation stages and any initial research and development and maintenance costs are expensed as incurred. Costs incurred in the application development stage are capitalized when the internal use software is placed in service, and amortized over the estimated economic life of the software from the date of implementation.
The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including estimated economic life. Capitalized software development costs are amortized on a straight line basis over 3 years, an estimated useful life.
Goodwill and other intangible assets
As of the acquisition date, the Company measures and recognizes goodwill as the excess of: (a) the aggregate of the fair value of consideration transferred, the fair value of any non-controlling interest in the acquiree (if any), and the acquisition date fair value of the Company’s previously held equity interest in the acquiree (if any), over (b) the fair value of net assets acquired and liabilities assumed. Goodwill acquired in Business Combinations is assigned to the reporting unit that is expected to benefit from the combination as of the acquisition date.
On an annual basis, the Company performs a qualitative assessment of goodwill to determine whether it is necessary to perform a quantitative impairment test or more frequently upon the occurrence of certain triggering events or substantive changes in circumstances. The Company is only required to perform the annual quantitative goodwill impairment test if it is concluded that it is more likely than not that a reporting unit’s fair value is less than its carrying amount.
Finite-lived intangible assets primarily consist of software with related technology, customer relationships, non-competition agreements and brand. These assets are initially capitalized based on fair value, acquisition cost, and fair value, if acquired as part of a business combination. The related costs are subsequently amortized on a straight-line basis over the estimated useful lives of the assets.
The Company tests intangible assets with finite useful lives for impairment when a triggering event occurs, or circumstances change indicating that the fair value of the entity may be below its carrying amount. If no triggering event occurs, further impairment testing is not necessary.
Contingencies
The Company is subject to legal, regulatory and other proceedings and claims that arise in the ordinary course of business. An estimated liability is recorded for those proceedings and claims when the loss from such proceedings and claims becomes probable and reasonably estimable. Outstanding claims are reviewed with internal and external counsel to assess the probability and the estimates of loss, including the possible range of an estimated loss. The risk of loss is reassessed each period and as new information becomes available and liabilities are adjusted as appropriate. The actual cost of resolving a claim may be substantially different from the amount of the liability recorded. Differences between the estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on the consolidated financial position but could possibly be material to the consolidated results of operations or cash flows for any one period.
Business combinations
Under the acquisition method of accounting, the Company recognizes, separately from goodwill, the identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.
The Company performs valuations of assets acquired and liabilities assumed and allocates the purchase price to its respective assets and liabilities. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, and selection of comparable companies. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. As a result, actual results may differ from these estimates. During the measurement period, the Company may record adjustments to acquired assets and assumed liabilities, with corresponding offsets to goodwill. Upon the conclusion of a measurement period, any subsequent adjustments are recorded to earnings.
At the acquisition date, the Company measures the fair values of all assets acquired and liabilities assumed that arise from contractual contingencies. The Company also measures the fair values of all non-contractual contingencies if, as of the acquisition date, it is more likely than not that the contingency will give rise to an asset or a liability.
Acquisition related costs not considered part of the consideration are expensed as incurred.
Goodwill and other intangible assets
As of the acquisition date, the Company measures and recognizes goodwill as the excess of: (a) the aggregate of the fair value of consideration transferred, the fair value of any non-controlling interest in the acquiree (if any), and the acquisition date fair value of the Company’s previously held equity interest in the acquiree (if any), over (b) the fair value of net assets acquired and liabilities assumed. Goodwill acquired in business combinations is assigned to the reporting unit that is expected to benefit from the combination as of the acquisition date.
On an annual basis, the Company performs a qualitative assessment of goodwill to determine whether it is necessary to perform a quantitative impairment test or more frequently upon the occurrence of certain triggering events or substantive changes in circumstances. The Company is only required to perform the annual quantitative goodwill impairment test if it is concluded that it is more likely than not that a reporting unit’s fair value is less than its carrying amount.
Finite-lived intangible assets primarily consist of software with related technology, customer relationships, non-competition agreements and brand. These assets are initially capitalized based on actual costs incurred, acquisition cost, or fair value, if acquired as part of a business combination. The related costs are subsequently amortized on a straight-line basis over the estimated useful lives of the assets.
The Company tests intangible assets with finite useful lives for impairment when a triggering event occurs, or circumstances change indicating that the fair value of the entity may be below its carrying amount. If no triggering event occurs, further impairment testing is not necessary.
Software development costs
Costs for software developed for internal use are capitalized during the preliminary stage and post-implementation stages and any maintenance costs are expensed as incurred. Costs incurred in the application development stage are capitalized when the internal use software is placed in service, and amortized over the estimated economic life of the software from the date of implementation.
The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life. Capitalized software development costs are amortized over an estimated useful life of three to five years.
Contingent consideration
The Company recognizes the fair value of any contingent consideration that is transferred to the seller in a business combination on the date at which control of the acquiree is obtained. Contingent consideration is classified as a liability or as equity on the basis of the definitions of an equity instrument and a financial liability. If the contingent consideration is payable in cash, the Company classifies its contingent consideration as a liability. Contingent consideration payments related to acquisitions are measured at fair value at each reporting period using Level 3 unobservable inputs. The Company’s estimates of fair value are based upon projected cash flow, estimated volatility and other inputs but which are uncertain and involve significant judgments by management. Any changes in the fair value of these contingent consideration payments are included in income from operations in the unaudited condensed consolidated statements of operations.
Fair value measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In most cases, the exit price and transaction (or entry) price will be the same at initial recognition. In this case, the fair value of financial instruments approximate fair value.
The fair value hierarchy uses a framework which requires categorizing assets and liabilities into one of three levels based on the inputs used in valuing the asset or liability.
• Level 1 inputs are unadjusted, quoted market prices in active markets for identical assets or liabilities.
• Level 2 inputs are observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
• Level 3 inputs include unobservable inputs that are supported by little, infrequent or no market activity and reflect management’s own assumptions about inputs used in pricing the asset or liability.
Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Warrants
The Private Placement Warrants meet the definition of a derivative under ASC 815. The Private Placement Warrants are recorded as liabilities on the balance sheet at fair value, with subsequent changes in their respective fair values recognized in the consolidated statement of earnings (loss) and consolidated statements of comprehensive income (loss) at each reporting date. The Private Placement Warrants are valued using a Black-Scholes-Merton pricing model using a Monte Carlo fair value analysis based on estimated Class A Common Stock volatility, market price and exercise price and the remaining life of the Private Placement Warrants.
Advertising costs
All advertising, promotional and marketing costs are expensed when incurred. Advertising, promotional and marketing costs for the three months ended March 31, 2021 and 2020 were $0.2 million and $0.5 million, respectively.
Stock-based compensation
Stock-based compensation is measured using the grant-date fair value of the award of equity instruments, including stock options and restricted stock units (“RSUs”). The expense is recognized over the requisite service period and forfeitures are recognized as incurred.
The fair value of options granted to employees is estimated on the grant date using the Black-Scholes-Merton option valuation model. This valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation, including the expected term (weighted-average period of time that the options granted are expected to be outstanding), the expected volatility in the fair market value of the Company’s common stock, a risk-free interest rate and expected dividends. The Company uses the simplified calculation of expected life as the contractual term for options of 10 years is longer than the Company has been publicly traded. The Company does not have enough historical perspective to estimate its volatility of its publicly traded shares or units. The Company’s common stock began trading on April 20, 2018; no cash dividends have been declared since that time, and we do not anticipate paying cash dividends in the foreseeable future. Expected volatility is based on an average of the historical volatilities of the common stock of several entities with characteristics similar to those of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The Company uses the straight-line method for expense attribution.
Income taxesTaxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change.
The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return, which are subject to examination by federal and state taxing authorities. The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based on technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties. The Company recognizes penalties and interest related to uncertain tax positions within the provision (benefit) for income taxes line in the accompanying consolidated statements of operations.
DMSH, the Company’s accounting predecessor, is a limited liability company treated as a partnership for U.S. federal income tax purposes and is not subject to entity-level U.S. federal income tax, (other thanexcept with respect to UE, which was acquired in November 2019. Because UE is treated as described above).a corporation for U.S. federal income tax purposes, it is subject to entity-level U.S. federal income tax. As a result of the Business Combination, the Company’sBlocker’s allocable share of earnings from DMSH are also subject to U.S. federal and state and local income taxes.
Tax Receivable Agreement
In conjunction with the Business Combination, DMS Inc. and Blocker also entered into the Tax Receivable Agreement with the Sellers. Pursuant to the Tax Receivable Agreement, DMS Inc. is required to pay the Sellers (i) 85% of the amount of savings, if
any, in U.S. federal, state and local income tax that DMS Inc. and Blocker actually realize as a result of (A) certain existing tax attributes of Blocker acquired in the Business Combination, and (B) increases in Blocker’s allocable share of the tax basis of the assets of DMS and certain other tax benefits related to the payment of the cash consideration pursuant to the Business Combination Agreement and any redemptions or exchanges of DMS Units for cash or Class A Common Stock after the Business Combination and (ii) 100% of certain refunds of pre-Closing taxes of DMSH and Blocker received during a taxable year beginning within two (2) years after the Closing. All such payments to the Sellers are the obligation of DMS Inc., and not that of DMSH. As a result of the Business Combination, the Company recorded a deferred tax asset and income tax receivable of $20.1 million and $199 thousand, respectively, with the offset as a long-term Tax Receivable Agreement liability of $16.3 million and Additional Paid-in Capital of $4.0 million in the consolidated balance sheet.
As of March 31, 2021, the total amount of under the Tax Receivable Agreement was $16.3 million, of which $0.5 million was current and included in Accrued expenses and other current liabilities on the consolidated balance sheet.
Earnings per share
Basic earnings per share of Class A common stock is computed by dividing net income attributable to DMS Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income attributable to DMS Inc., adjusted for the assumed exchange of all potentially dilutive securities, by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive elements.
Prior to the Business Combination, the membership structure of DMSH included units which had profit interests. The Company analyzed the calculation of earnings per unit for periods prior to the Business Combination and determined that it resulted in values that would not be meaningful to the users of these consolidated financial statements. Therefore, earnings per share information has not been presented for January 1, 2020 through July 15, 2020, the Business Combination date.
RECENTLY ISSUED ACCOUNTING STANDARDS
Refer to Note 1. Summary of Significant Accounting Policies in the Notes to Unaudited Condensed Consolidated Financial Statements, included in Item 1. Financial Statements of this report,Quarterly Report, for a more detailed discussion on recent accounting pronouncements and the related impact on our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In addition to the inherent operational risks, the Company is exposed to certain market risks, primarily related to changes in interest rates.
As of September 30,the quarter ended March 31, 2021 and year ended December 31, 2020 we had $203.8$229.0 million outstanding under our Monroe Facility, which bearshad an effective interest atrate of 5.19% and 5.20% for the quarter ended March 31, 20211 and year ended December 31, 2020, respectively.
The effective interest rate was in a variable rate range between 5.19% and 5.24%, equal to the three-month LIBOR, or an alternate base rate, plus an agreed upon margin with the lender. Refer to Note 6.7. Debt in the Notes to Unaudited Condensed Consolidated Financial Statements, included in Item 1. Notes to Unaudited Condensed Consolidated Financial Statements ofin this report,Quarterly Report, for further details on our debt.
LIBOR is expected to be discontinued after 2021. The expected discontinuation of LIBOR will require borrowers to transition from LIBOR to an alternative benchmark interest rate. We are currently evaluating the impact of the transition from LIBOR as an interest rate benchmark to other potential alternative reference rates. We do not currently have material contracts, with the exception of the above mentionedabove-mentioned items, that are indexed to LIBOR. We will continue to actively assess the related opportunities and risks involved in this transition.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this Item 3.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended September 30, 2020,March 31, 2021, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that during the period covered by this report,Quarterly Report, our disclosure controls and procedures were effective.
Disclosure controls and procedures are designed to ensure that information required to be disclosed by usnot effective because of the material weaknesses in our Exchange Act reportsinternal control over financial reporting described in our Annual Report on Form 10-K/A for the year ended December 31, 2020, filed on May 17, 2021. A material weakness is recorded, processed, summarized, and reported within the time periods specifieda deficiency, or combination of deficiencies, in the SEC’s rules and forms, andinternal control over financial reporting such that such informationthere is accumulated and communicated toa reasonable possibility that a material misstatement of our management, including our principal executive officer and principalquarterly interim consolidated financial officerstatements will not be prevented or persons performing similar functions, as appropriate to allowdetected on a timely decisions regarding required disclosure.basis.
Changes toin Internal Control Over Financial Reporting
As discussed elsewhere in this Quarterly Report on Form 10-Q, we completed the Business Combination on July 15, 2020. Prior to the Business Combination, DMSH’s internal control over financial reporting was not required to be designed or maintained in accordance with Exchange Act Rule 13a-15. The design of internal control over financial reporting requires significant time and resources from our management and other personnel. Furthermore, Leo, the legal acquirer in the Business Combination, was a special-purpose acquisition company prior to the Business Combination and, as such, Leo’s internal control over financial reporting no longer existed as of September 30, 2020.
Since completing the Business Combination, with the oversight of senior management and our audit committee, we have begunbeen taking steps to improve and enhance our internal control over financial reporting.reporting, and more recently to remediate the material weaknesses described in our Annual Report on Form 10-K/A for the year ended December 31, 2020, filed on May 17, 2021. These steps includeinclude: (i) moving to a new accounting system for the replacement of legacyperiod commencing on January 1, 2021 for more efficient and timely reporting; (ii) hiring additional personnel to oversee and effectively allow for formally documenting accounting systems associatedpolicies and ensuring compliance with our acquisitions with a centralized, comprehensive accounting system. These steps have also included working on the developmentrequirements; (iii) continuing to improve and implementation of formalmaintain policies, improved processes and documenteddocumentation procedures as well asto improve the hiringoverall efficiency and accuracy of additionalour financial reporting; and (iv) establishing an ongoing program of education for our corporate finance personnel.and reporting employees, specifically including U.S. GAAP and the application of accounting pronouncements.
Except as disclosed above, there was no change in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2020March 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in various disputes and litigation that arise in the ordinary course of business. However, separate from such matters, to the best of our knowledge, there are no material pending or threatened legal proceedings to which we are a party, either individually or in the aggregate.
Item 1A. Risk Factors
ThereAs of March 31, 2021, there have been no material changes to ourthe risk factors as previously disclosedset forth in the section entitled, “Risk Factors” beginning on page 39 of the Proxy Statement/Prospectus, which is incorporated by reference into our CurrentAnnual Report on Form 8-K/10-K/A for the year ended December 31, 2020, filed on July 20, 2020. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.May 17, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are filed as part of this report:
| | | | | | | | |
Exhibit
Number | | Description |
| | |
| | Amendment No. 1 to Business Combination Agreement, dated July 2, 2020, by and among Leo Holdings Corp., Clairvest GP Manageco Inc., as a Seller Representative, Prism Data, LLC, as a Seller Representative, and Leo Investors Limited Partnership, incorporated by reference to Exhibit 2.1 to Leo Holdings Corp.’s Current Report on Form 8-K (File No. 001-38393) filed with the SEC on July 2, 2020. |
| | Certificate of Incorporation of Digital Media Solutions, Inc., incorporated (incorporated by reference to the Registrant’sExhibit 3.1 to Digital Media Solutions, Inc.’s Current Report on Form 8-K (File No. 001-38393) filed with the SEC on July 16, 2020.2020). |
| | Bylaws of Digital Media Solutions, Inc., incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 001-38393) filed with the SEC on July 16, 2020. |
| | Form of Specimen Class A Common Stock Certificate of Digital Media Solutions, Inc., incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 001-38393) filed with the SEC on July 16, 2020. |
| | Form of Specimen Warrant Certificate of Digital Media Solutions, Inc., incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 001-38393) filed with the SEC on July 16, 2020. |
| | Amended and Restated Warrant Agreement, dated July 15, 2020, by and among Leo Holdings Corp. and Continental Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.33.2 to Digital Media Solutions, Inc.’s Current Report on Form 8-K/A8-K filed with the SEC on July 20,16, 2020). |
| | Amended and Restated Limited Liability Company Agreement of Digital Media Solutions Holdings, LLC, dated July 15, 2020 (incorporated by reference to Exhibit 10.3 to Digital Media Solutions, Inc.’s Current Report on Form 8-K/A filed with the SEC on July 20, 2020). |
| | Director Nomination Agreement, dated July 15, 2020, by and among Digital Media Solutions, Inc., Leo Investors Limited Partnership, Lion Capital (Guernsey) Bridgeco Limited, Clairvest Group Inc. and Prism Data, LLC (incorporated by reference to Exhibit 10.4 to Digital Media Solutions, Inc.’s Current Report on Form 8-K/A filed with the SEC on July 20, 2020). |
| | Amended and Restated Registration Rights Agreement, dated July 15, 2020, by and among Digital Media Solutions, Inc., as successor to Leo Holdings, Corp., and the other parties thereto (incorporated by reference to Exhibit 10.5 to Digital Media Solutions, Inc.’s Current Report on Form 8-K/A filed with the SEC on July 20, 2020). |
| | Tax Receivable Agreement, dated July 15, 2020, by and among Digital Media Solutions, Inc., CEP V DMS US Blocker Company, Prism Data, LLC, CEP V-A DMS AIV Limited Partnership, Clairvest Equity Partners V Limited Partnership, CEP V Co-Investment Limited Partnership and Clairvest GP Manageco Inc. (incorporated by reference to Exhibit 10.6 to Digital Media Solutions, Inc.’s Current Report on Form 8-K/A filed with the SEC on July 20, 2020). |
| | Lock-Up Agreement, dated July 15, 2020, by and among Digital Media Solutions, Inc. CEP V DMS US Blocker Company, Prism Data, LLC, CEP V-A DMS AIV Limited Partnership, Clairvest Equity Partners V Limited Partnership and CEP V Co-Investment Limited Partnership (incorporated by reference to Exhibit 10.7 to Digital Media Solutions, Inc.’s Current Report on Form 8-K/A filed with the SEC on July 20, 2020). |
| | Form of Indemnification Agreement (incorporated by reference to Exhibit 10.8 to Digital Media Solutions, Inc.’s Current Report on Form 8-K/A filed with the SEC on July 17, 2020). |
| | Digital Media Solutions, Inc. 2020 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.9 to Digital Media Solutions, Inc.’s Current Report on Form 8-K/A filed with the SEC on July 20, 2020). |
| | Letter Agreement, dated July 8, 2020, by and between Digital Media Solutions, LLC and Joey Liner (incorporated by reference to Exhibit 10.10 to Digital Media Solutions, Inc.’s Current Report on Form 8-K/A filed with the SEC on July 20, 2020). |
| | Letter Agreement, dated July 8, 2020, by and between Digital Media Solutions, LLC and Randall Koubek (incorporated by reference to Exhibit 10.11 to Digital Media Solutions, Inc.’s Current Report on Form 8-K/A filed with the SEC on July 20, 2020). |
| | Offer Letter, dated October 23, 2018, by and between Digital Media Solutions, LLC and Joey Liner (incorporated by reference to Exhibit 10.12 to Digital Media Solutions, Inc.’s Current Report on Form 8-K/A filed with the SEC on July 20, 2020). |
| | Offer Letter, dated November 21, 2018, by and between Digital Media Solutions, LLC and Randall Koubek (incorporated by reference to Exhibit 10.13 to Digital Media Solutions, Inc.’s Current Report on Form 8-K/A filed with the SEC on July 20, 2020). |
| | | | | | | | |
| | Credit Agreement, dated July 3, 2018, by and among Digital Media Solutions Holdings, LLC, Digital Media Solutions, LLC, each of its affiliates party thereto, various financial institutions part thereto and Monroe Capital Management Advisors, LLC, as Administrative Agent and Lead Arranger (incorporated by reference to Exhibit 10.14 to Digital Media Solutions, Inc.’s Current Report on Form 8-K/A filed with the SEC on July 20, 2020). |
| | Incremental Amendment No. 5 to Credit Agreement, dated JulyFebruary 1, 2019, by and among Digital Media Solutions Holdings, LLC, Digital Media Solutions, LLC, each of its affiliates party thereto, and Monroe Capital Management Advisors, LLC, as Administrative Agent (incorporated by reference to Exhibit 10.15 to Digital Media Solutions, Inc.’s Current Report on Form 8-K/A filed with the SEC on July 20, 2020). |
| | Incremental Amendment No. 2 to Credit Agreement, dated November 1, 2019, by and among Digital Media Solutions Holdings, LLC, Digital Media Solutions, LLC, each of its affiliates party thereto, and Monroe Capital Management Advisors, LLC, as Administrative Agent (incorporated by reference to Exhibit 10.16 to Digital Media Solutions, Inc.’s Current Report on Form 8-K/A filed with the SEC on July 20, 2020). |
| | Amendment No. 3 to Credit Agreement, dated January 7, 2020, by and among Digital Media Solutions Holdings, LLC, Digital Media Solutions, LLC, each of its affiliates party thereto, and Monroe Capital Management Advisors, LLC, as Administrative Agent (incorporated by reference to Exhibit 10.17 to Digital Media Solutions, Inc.’s Current Report on Form 8-K/A filed with the SEC on July 20, 2020). |
| | Amendment No. 4 to Credit Agreement, dated August 26, 2020,2021, by and among Digital Media Solutions Holdings, LLC, Digital Media Solutions, LLC, each of the affiliates of Digital Media Solutions, LLC party thereto, various financial institutions party thereto and Monroe Capital Management Advisors, LLC, as Administrative Agent (incorporated by reference to Exhibit 10.1 to Digital Media Solutions, Inc.’s Current Report on Form 8-K filed with the SEC on August 28, 2020)February 4, 2021). |
| | Offer Letter, dated February 13, 2021, by and between Digital Media Solutions, Inc. and Vasundara Srenivas (incorporated by reference to Exhibit 10.1 to Digital Media Solutions, Inc.’s Current Report on Form 8-K filed with the SEC on February 19, 2021). |
| | Letter Agreement, dated March 16, 2021, by and between Digital Media Solutions, Inc. and Randall Koubek (incorporated by reference to Exhibit 10.15 to Digital Media Solutions, Inc.’s Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 filed with the SEC on March 26, 2021). |
| | Amendment No. 1 to Amended and Restated Limited Liability Company Agreement of Digital Media Solutions Holdings, LLC, dated January 19, 2021 (incorporated by reference to Exhibit 10.4 to Digital Media Solutions, Inc.’s Annual Report on Form 10-K/A filed with the SEC on May 17, 2021). |
| | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101 | | The following financial information for the period ended September 30, 2020,March 31, 2021, formatted in Inline XBRL: (i) Unaudited Condensed Consolidated Balance Sheets; (ii) Unaudited Condensed Consolidated Statements of Operations; (iii) Unaudited Condensed Consolidated Statements of Changes in Equity; (iv) Unaudited Condensed Consolidated Statements of Cash Flows; and (v) Notes to Unaudited Condensed Consolidated Financial Statements. |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)* |
+ Certain schedules to this Exhibit have been omitted in accordance with Item 601(a)(5) of Regulation S-K.
#Management contract and compensatory plan and arrangement.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: November 9, 2020May 17, 2021
| | | | | | | | |
| | |
| Digital Media Solutions, Inc. |
| | |
| /s/ Joseph Marinucci |
| Name: | Joseph Marinucci |
| Title: | President and Chief Executive Officer
(Principal Executive Officer) |
| | |
| /s/ Randall KoubekVasundara Srenivas |
| Name: | Randall KoubekVasundara Srenivas |
| Title: | Chief Financial Officer
(Principal Financial and Accounting Officer) |
