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Tax Receivable Agreement and Income Taxes
 12 Months Ended
Dec. 31, 2024
Tax Receivable Agreement and Income Taxes [Abstract]  
Tax Receivable Agreement and Income Taxes
Note 5 — Tax Receivable Agreement and Income Taxes
Tax Receivable Agreement
The Company’s TRA with DDH LLC and DDM (together, the “TRA Holders”) provides for payment by the Company to the TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that the Company actually realizes or is deemed to realize in certain circumstances. The Company retains the benefit of the remaining 15% of these net cash savings.
The TRA liability is calculated by determining the tax basis subject to the TRA (“tax basis”) and applying a blended tax rate to the basis differences and calculating the resulting impact. The blended tax rate consists of the U.S. federal income tax rate and assumed combined state and local income tax rate driven by the apportionment factors applicable to each state. Any taxable income or loss generated by the Company will be allocated to TRA Holders in accordance with the LLC Agreement and the TRA, and distributions to the owners of LLC Units in an amount sufficient to fund their tax obligations will be made. Pursuant to the Company’s election under Section 754 of the Code in 2022, the Company expects to obtain an increase in its share of the tax basis in the net assets of DDH, LLC when LLC interests are redeemed or exchanged by the members of DDH, LLC. In December 31, 2023, members of DDM exchanged 410,000 Class B shares into Class A shares.
The Company has recorded a liability related to the tax receivable agreement of $0 and $5.2 million as of December 31, 2024 and 2023, respectively. The Company has recorded a deferred tax asset of $0 and $6.2 million as of December 31, 2024 and 2023, respectively. The deferred tax asset is net of a valuation allowance of $7.7 million and $0.5 million as of December 31, 2024 and 2023, respectively. Payments of $0 and less than $0.1 million were made during the years ended December 31, 2024 and 2023. The payments under the TRA will not be conditional on holder of rights under the TRA having a continued ownership interest in either DDH LLC or the Company. The Company may elect to defer payments due under the TRA if the Company does not have available cash to satisfy its payment obligations under the TRA. Any such deferred payments under the TRA generally will accrue interest from the due date for such payment until the payment date. The Company accounts for any amounts payable under the TRA in accordance with ASC Topic 450, Contingencies, and recognizes subsequent period changes to the measurement of the liability from the TRA in the statement of operations as a component of income before taxes. For the year ended December 31, 2024, $5.2 million was recognized as income under other income (expense) due to the derecognition of the TRA liability, as a valuation allowance was recorded against the deferred taxes associated with the TRA.
The term of the TRA commenced upon completion of the initial public offering and will continue until all tax benefits that are subject to the TRA have been utilized or expired, unless the Company exercises its right to terminate the TRA. If the Company elects to terminate the TRA early (or it is terminated early due to changes in control), the obligations under
the TRA would accelerate and the Company would be required to make an immediate payment equal to the present value of the anticipated future payments to be made by the Company under the TRA.
Income Taxes
Through the Organizational Transactions completed in February 2022, the Company formed an Up-C structure which allows DDM to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership for U.S. federal income tax purposes. Under the Up-C structure, the Company is subject to corporation income tax based on the ownership. There was no exchange of shares of Class B Common Stock for shares of Class A Common Stock in the year ended December 31, 2024.
The components of income tax expense are as follows (in thousands):
Year Ended December 31,
20242023
Current:
Federal$— $— 
State— — 
Total current— — 
Deferred:
Federal$5,192 $205 
State940 363 
Total deferred6,132 568 
Total income tax expense$6,132 $568 
A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
Year Ended December 31,
20242023
Federal income tax expense at statutory rate21.0 %21.0 %
State income tax expense— %0.6 %
Partnership income not taxed(22.0)%(17.0)%
Valuation allowance(51.9)%(7.3)%
Deferred tax remeasurement— %(6.5)%
Derecognition of tax receivable agreement liability7.9 %— %
Other0.5 %0.1 %
Effective income tax rate(44.5)%(9.1)%
Deferred tax assets and liabilities reflect the net tax effects of net operating loss and tax credit carryforwards and temporary differences between the carrying amount of assets and liabilities for financial reporting and the amounts used for tax purposes. The components of deferred tax assets are as follows (in thousands):
December 31,
20242023
Deferred tax assets related to:
Net operating loss carryforwards$1,454 $280 
Partnership basis difference and other6,255 6,312 
Total deferred tax assets$7,709 $6,592 
Valuation allowance(7,709)(460)
Total deferred tax assets, net$— $6,132 
As of December 31, 2024, the Company had federal and state net operating loss carryforwards of $5.8 million and $3.7 million, respectively. Federal net operating loss carryforwards can be carried forward indefinitely and state net operating loss carryforwards are carried forward to each jurisdiction based on the varying state statutes. The Company recorded a valuation allowance of $7.7 million against its deferred tax assets at December 31, 2024. The valuation allowance increased by $7.2 million when compared to the valuation allowance $0.5 million recorded as of December 31, 2023.
The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions. In the normal course of business, the Company can be examined by various tax authorities, including the Internal Revenue Service in the United States. There are currently no federal or state audits in process. The Company analyzes its tax filing positions in all of the U.S. federal, state and local tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. Federal and various states returns for the years ended December 2023 and 2022 remain open as of December 31, 2024. The Company evaluates tax positions taken or expected to be taken in the course of preparing an entity’s tax returns to determine whether it is “more-likely-than-not” that each tax position will be sustained by the applicable tax authority. As of December 31, 2024 and 2023, the Company had no uncertain tax positions. Accordingly, the Company has not recognized any penalty, interest or tax impact related to uncertain tax positions.