What changed in this filing

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Item 1. Financial Statements

2022-08-15 compared with 2022-05-16 · 306 added, 160 removed, 454 unchanged (51% of the section changed)

3 unchanged sentences

CONSOLIDATED BALANCE SHEETS

March 31, 2022

June 30, 2022

December 31, 2021

5 unchanged sentences

Intangible assets, net (Note 3)

Deferred financing costs, net (Note 2)

Deferred tax asset, net (Note 12)

Deferred financing costs, net

Operating lease right-of-use assets

Other long-term assets

LIABILITIES AND MEMBERS' EQUITY

LIABILITIES AND STOCKHOLDER’ / MEMBERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:

1 unchanged sentence

Accrued liabilities

Current portion of liability related to tax receivable agreement

Notes payable, current portion

1 unchanged sentence

Operating lease liabilities, current portion

Income taxes payable

Related party payables (Note 7)

5 unchanged sentences

Economic Injury Disaster Loan

Liability related to tax receivable agreement, net of current portion

Operating lease liabilities, net of current portion

4 unchanged sentences

34,182 units issued and outstanding as of December 31, 2021

Class A common stock, $ 0.001 par value per share, 160,000,000 shares authorized, 2,800,000 shares issued and outstanding as of March 31, 2022

Class B common stock, $ 0.001 par value per share, 20,000,000 shares authorized, 11,378,000 shares issued and outstanding as of March 31, 2022

Class A common stock, $ 0.001 par value per share, 160,000,000 shares authorized, 3,163,214 shares issued and outstanding as of June 30, 2022

Class B common stock, $ 0.001 par value per share, 20,000,000 shares authorized, 11,378,000 shares issued and outstanding as of June 30, 2022

Additional paid-in capital

3 unchanged sentences

Total stockholders’ / members' equity (deficit)

Total liabilities and stockholders’ / members' equity

Total liabilities and stockholders’ / members' equity (deficit)

See accompanying notes to the unaudited consolidated financial statements.

2 unchanged sentences

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31,

For the Three Months Ended

For the Six Months Ended

Buy-side advertising

9 unchanged sentences

Total operating expenses

Income (loss) from operations

Income from operations

Other income (expense)

Forgiveness of Paycheck Protection Program loan

Gain from revaluation and settlement of seller notes and earnout liability

Loss on redemption of non-participating preferred units

Interest expense

( 1,364,038 )

( 1,640,167 )

Total other expense

( 1,619,602 )

Net loss per common share / unit:

Basic and diluted

Weighted-average number of common shares / units outstanding:

Basic and diluted

( 1,589,749 )

Income before taxes

Net income per common share / unit:

Weighted-average number of shares of common stock / units outstanding:

See accompanying notes to the unaudited consolidated financial statements.

2 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ / MEMBERS’ EQUITY (DEFICIT)

Common Shares

Balance, December 31, 2020

( 1,925,951 )

Distributions to members

Balance, March 31, 2021

( 2,735,388 )

Common Shares

Six Months Ended June 30, 2022

Stockholders’

1 unchanged sentence

( 4,669,097 )

Issuance of Class A common shares, net of transaction costs

Issuance of Class A common stock,net of transaction costs

Conversion of member units to Class B shares

3 unchanged sentences

( 7,200,000 )

Stock-based compensation

Issuance of restricted stock

Distributions to members

Additional paid-in capital related to tax receivable agreement

Balance, June 30, 2022

( 3,036,348 )

Three Months Ended June 30, 2022

Stockholders’

Balance, March 31, 2022

( 5,489,170 )

Transaction costs associated with IPO

Stock-based compensation

Issuance of restricted stock

Distributions to members

Additional paid-in capital related to tax receivable agreement

Balance, June 30, 2022

( 3,036,348 )

See accompanying notes to the unaudited consolidated financial statements.

1 unchanged sentence

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ / MEMBERS’ EQUITY (DEFICIT)

Six Months Ended June 30, 2021

Balance, December 31, 2020

( 1,925,951 )

Distributions to members

Balance, June 30, 2021

( 1,728,453 )

Three Months Ended June 30, 2021

Stockholders'

Balance, March 31, 2021

( 2,735,388 )

Distributions to members

Balance, June 30, 2021

( 1,728,453 )

See accompanying notes to the unaudited consolidated financial statements.

DIRECT DIGITAL HOLDINGS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31,

For the Six Months Ended June 30,

Cash Flows (Used In) Provided By Operating Activities:

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Amortization of deferred financing costs

Amortization of intangible assets

Amortization of right-of-use asset

Amortization of right-of-use assets

Stock-based compensation

Forgiveness of Paycheck Protection Program loan

Paid-in-kind interest

Deferred income taxes

Gain from revaluation and settlement of earnout liability

Loss on redemption of non-participating preferred units

Bad debt expense recovery

Bad debt expense

Changes in operating assets and liabilities:

Accounts receivable

Prepaid expenses and other current assets

( 6,996,667 )

Prepaid expenses and other assets

Accounts payable

Accrued liabilities

Income taxes payable

Deferred revenues

Operating lease liabilities

Operating lease liability

Related party payable

Net cash (used in) provided by operating activities

Net cash provided by operating activities

Cash Flows Provided By (Used In) Financing Activities:

Proceeds from issuance of Class A common shares, net of transaction costs

Payments on term loan

Payment of deferred financing costs

Redemption of non-participating preferred shares

( 7,046,251 )

Proceeds from Paycheck Protection Program loan

Proceeds from Issuance of Class A common stock, net of transaction costs

Redemption of common units

( 3,237,838 )

Redemption of non-participating preferred units

( 7,046,251 )

Payments on seller notes and earnouts payable

Distributions to members

Net cash provided by (used in) financing activities

Net (decrease) increase in cash and cash equivalents

Net increase in cash and cash equivalents

Cash and cash equivalents, beginning of the period

6 unchanged sentences

Common unit redemption balance included in accrued liabilities

Outside basis difference in partnership

TRA payable to Direct Digital Management, LLC

Tax benefit on TRA

See accompanying notes to the unaudited consolidated financial statements.

11 unchanged sentences

completed an initial public offering of its securities and, together with DDH LLC, effected a series of transactions (together, the “Organizational Transactions”) whereby Direct Digital Holdings, Inc.

became the sole managing member of DDH LLC, the holder of 100 % of the voting interests of DDH LLC and the holder of 19.7 % of the economic interests of DDH LLC.

became the sole managing member of DDH LLC, the holder of 100 % of the voting interests of DDH LLC and the holder of 19.7 % of the economic interests of DDH LLC, commonly referred to as an “Up-C” structure.

(See Note 7 – Related Party Transactions).

In these financial statements, the “Company,” “Direct Digital,” “Direct Digital Holdings,” “DDH,” “we,” “us” and “our” refer (i) following the completion of the Organizational Transactions, including the initial public offering, to Direct Digital Holdings, Inc., and, unless otherwise stated, all of its subsidiaries, including DDH LLC, and, unless otherwise stated, its subsidiaries, and (ii) on or prior to the completion of the Organizational Transactions, to DDH LLC.

22 unchanged sentences

GAAP”) and reflect the financial position, results of operations and cash flows for all periods presented.

The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 29, 2022.

In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the results for the periods presented.

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards otherwise applicable to public companies until such time as those standards apply to private companies.

The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) it affirmatively and irrevocably opts out of the extended

transition period provided in the JOBS Act.

As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

22 unchanged sentences

Such deposits may, at times, exceed federally insured limits.

As of March 31, 2022, $ 3,135,548 of the Company’s cash and cash equivalents exceeded the federally insured limits.

As of June 30, 2022, $ 3,549,295 of the Company’s cash and cash equivalents exceeded the federally insured limits.

The Company has not experienced any losses in such amounts and believes it is not exposed to any significant credit risk to cash.

3 unchanged sentences

Accounts receivables are stated at net realizable value.

The Company began insuring its accounts receivable with unrelated third-party insurance companies in an effort to mitigate any future write-offs and establish an allowance for doubtful accounts as deemed necessary for accounts not covered by this insurance.

As of March 31, 2022 and December 31, 2021, the Company’s allowance for doubtful accounts was $ 40,360 and $ 40,856 , respectively.

The Company began insuring its accounts receivable with unrelated third-party insurance companies in an effort to mitigate any future write-offs and establishes an allowance for doubtful accounts as deemed necessary for accounts not covered by this insurance.

As of June 30, 2022 and December 31, 2021, the Company’s allowance for doubtful accounts

was $ 25,571 and $ 40,856 , respectively.

Management periodically reviews outstanding accounts receivable for reasonableness.

1 unchanged sentence

The guaranteed recovery for the claim is approximately 90 % of the original balance, and if the full amount is collected by the insurance company, the remaining 10 % is remitted to the Company.

If the insurance company is unable to

collect the full amount, the Company records the remaining 10 % to bad debt expense.

Bad debt expense related to recoveries was $( 2,425 ) and $ 0 for the three months ended March 31, 2022 and 2021, respectively.

If the insurance company is unable to collect the full amount, the Company records the remaining 10 % to bad debt expense.

Bad debt expense was $ 27,224 and $ 31,815 for the three months ended June 30, 2022 and 2021, respectively, and $ 24,799 and $ 31,815 for the six months ended June 30, 2022 and 2021, respectively.

Concentrations of credit risk

5 unchanged sentences

Leasehold improvements are amortized over the shorter of their useful lives or the remaining terms of the related leases.

As of March 31, 2022 and December 31, 2021, the Company has fully depreciated all property and equipment.

As of June 30, 2022 and December 31, 2021, the Company has fully depreciated all property and equipment.

The cost of repairs and maintenance are expensed as incurred.

7 unchanged sentences

Goodwill is reviewed annually and tested for impairment upon the occurrence of a triggering event.

As of March 31, 2022, goodwill was $ 6,519,636 which includes $ 2,423,936 as a result of the acquisition of Huddled Masses and Colossus Media in 2018 and $ 4,095,700 of goodwill recognized from the acquisition of Orange142 in September 2020.

As of June 30, 2022, goodwill was $ 6,519,636 , which includes $ 2,423,936 as a result of the acquisition of Huddled Masses and Colossus Media in 2018 and $ 4,095,700 of goodwill recognized from the acquisition of Orange142 in September 2020.

Intangible assets, net

6 unchanged sentences

If the sum of the undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized.

Any impairment loss, if indicated, is measured as the amount by which the carrying

amount of the asset exceeds its estimated fair value and is recognized as a reduction in the carrying amount of the asset.

As of March 31, 2022 and December 31, 2021, there were no events or changes in circumstances to indicate that the carrying amount of the assets may not be recoverable.

Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds its estimated fair value and is recognized as a reduction in the carrying amount of the asset.

As of June 30, 2022 and December 31, 2021, there were no events or changes in circumstances to indicate that the carrying amount of the assets may not be recoverable.

Fair value measurements

12 unchanged sentences

These costs are deferred and amortized to interest expense using the straight-line method over the life of the debt.

In December 2021, the Company amended its line of credit with East West Bank (see Note 5 – Long Term Debt) and incurred additional deferred financing costs of $ 4,613 during the three months ended March 31, 2022.

Unamortized deferred financing costs related to the line of credit was $ 66,869 and $ 96,152 as of March 31, 2022 and December 31, 2021, respectively, and due to the revolving nature of this debt, was classified as an asset on the consolidated balance sheets.

In December 2021, the Company entered into an agreement with Lafayette Square Loan Servicing, LLC (“Lafayette Square”) (see Note 5 – Long Term Debt) and incurred additional deferred financing costs of $ 180,480 during the three months ended March 31, 2022.

Unamortized deferred financing costs was $ 2,153,821 and $ 2,091,732 as of March 31, 2022 and December 31, 2021, respectively, and netted against the outstanding debt on the consolidated balance sheets.

In December 2021, the Company amended its line of credit with East West Bank (see Note 5 – Long-Term Debt) and incurred additional deferred financing costs of $ 4,613 during the six months ended June 30, 2022.

Unamortized deferred financing costs related to the line of credit was $ 33,434 and $ 96,152 as of June 30, 2022 and December 31, 2021, respectively, and due to the revolving nature of this debt, was classified as an asset on the consolidated balance sheets.

In December 2021, the Company entered into an agreement with Lafayette Square Loan Servicing, LLC (“Lafayette Square”) (see Note 5 – Long-Term Debt) and incurred additional deferred financing costs of $ 180,480 during the six months ended June 30, 2022.

Unamortized deferred financing costs was $ 2,038,438 and $ 2,091,732 as of June 30, 2022 and December 31, 2021, respectively, and netted against the outstanding debt on the consolidated balance sheets.

Right-of-use assets

26 unchanged sentences

Cash payments received prior to the Company’s delivery of its services are recorded to deferred revenue until the performance obligation is satisfied.

The Company recorded deferred revenue (contract liabilities) to account for billings in excess of revenue recognized, primarily related to contractual minimums billed in advance and customer prepayment, of $ 431,432 and $ 1,348,093 as of March 31, 2022 and December 31, 2021, respectively.

The Company recorded deferred revenue (contract liabilities) to account for billings in excess of revenue recognized, primarily related to contractual minimums billed in advance and customer prepayment, of $ 442,982 and $ 1,348,093 as of June 30, 2022 and December 31, 2021, respectively.

Sell-side advertising

1 unchanged sentence

The Company generates revenue from the delivery of targeted digital media solutions, enabling advertisers to connect intelligently with their audiences across online display, video, social and mobile mediums using its proprietary programmatic sell-side platform (“SSP”).

The Company refers to its publishers, app developers, and channel partners collectively as its publishers.

The Company refers to its publishers, app developers, and channel partners collectively as its

The Company generates revenue through the monetization of publisher ad impressions on its platform.

5 unchanged sentences

The following table sets forth our concentration of revenue sources as a percentage of total revenues on a consolidated basis.

For the Three Months

Three Months Ended

Six Months Ended

Cost of revenues

7 unchanged sentences

The Company expenses advertising costs as incurred.

Advertising expense incurred during the three months ended March 31, 2022 and 2021 was $ 102,348 and $ 41,920 , respectively.

Advertising expense incurred during the three months ended June 30, 2022 and 2021 was $ 220,326 and $ 66,624 , respectively and $ 322,667 and $ 108,544 for the six months ended June 30, 2022 and 2021, respectively.

These costs are included in general and administrative expenses in the consolidated statements of operations.

Effective February 15, 2022, concurrent with the closing of the Company’s initial public offering, the Company entered into a tax receivable agreement (“Tax Receivable Agreement” or “TRA”) with DDH LLC and Direct Digital Management, LLC (“DDM”).

Stock-Based Compensation

The Company recognizes and measures compensation expense for all stock-based payment awards granted to employees, directors and non-employee directors, including stock options and restricted stock units (“RSUs”) based on the fair value of the awards on the date of grant.

The fair value of stock options is estimated using the Black Scholes option pricing model.

The grant date fair value of RSUs is based on the prior day closing market price of the Company’s Class A common stock.

The Black Scholes option pricing model inputs include the fair value of the Company’s common stock, as well as assumptions regarding the expected common stock price volatility over the term of the stock options, the expected term of the stock options, risk-free interest rates, and the expected dividend yield.

For additional information regarding stock-based compensation and the assumptions used for determining the fair value of stock options, see Note 9 — Stockholders’ / Members’ Equity (Deficit) and Stock-Based Compensation Plans.

Income Per Share / Unit

Basic income per share / unit is calculated by dividing net income available to common stockholders by the weighted average number of shares / units outstanding for the period.

Potentially dilutive securities include potential shares of common stock related to our stock options and restricted stock units.

Diluted earnings per share considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of potential shares of common stock would have an anti-dilutive effect.

Diluted income per share/ unit excludes the impact of potential shares of common stock related to our stock options in periods in which the options exercise price is greater than the average market price of our common stock for the period.

The Tax Receivable Agreement provides for certain income (loss) allocations between the Company and DDH LLC under the agreement.

1 unchanged sentence

federal income tax and certain state and local income taxes.

Any taxable income or loss generated by the Company will be allocated to holders of LLC Units in accordance with the TRA, and distributions to the owners of LLC Units in an amount sufficient to fund their tax obligations will be made.

Any taxable income or loss generated by the Company will be allocated to holders of LLC units (“LLC Units”) in accordance with the TRA, and distributions to the owners of LLC Units in an amount sufficient to fund their tax obligations will be made.

The Company is subject to U.S.

1 unchanged sentence

Pursuant to the Company’s election under Section 754 of the Internal Revenue Code (the “Code”), 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.

The Company plans to make an election under Section 754 if the Code for each taxable year in which a redemption or exchange of LLC interest occurs.

As of March 31, 2022, no redemptions or exchanges have been made by the members of DDH, LLC.

The Company plans to make an election under Section 754 of the Code for each taxable year in which a redemption or exchange of LLC interest occurs.

As of June 30, 2022, no redemptions or exchanges have been made by the members of DDH, LLC.

The Company applies ASC 740-10, Income Taxes (“ASC 740-10”), in establishing standards for accounting for uncertain tax positions.

2 unchanged sentences

First, the Company determines whether any amount may be recognized and then determines how much of a tax benefit or provision should be recognized.

As of March 31, 2022 and December 31, 2021, the Company had no uncertain tax positions.

As of June 30, 2022 and December 31, 2021, the Company had no uncertain tax positions.

Accordingly, the Company has not recognized any penalty, interest or tax impact related to uncertain tax positions.

If the Company were to incur an income tax liability in the future, interest on any income tax liability would be reported as interest expense and penalties on any income tax liability would be reported as income taxes.

The Company’s

conclusions regarding uncertain tax positions may be subject to review and adjustments at a later date based upon ongoing analyses of tax laws, regulations and interpretations thereof as well as other factors.

The Company’s conclusion regarding uncertain tax positions may be subject to review and adjustments at a later date based upon ongoing analyses of tax laws regulations and interpretations thereof as well as other factors.

See Note 12 – Tax Receivable Agreement and Income Taxes.

Segment information

5 unchanged sentences

The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No.

2016-02, “Leases (Topic 842)”.

The new lease guidance supersedes Topic 840.

The core principle of the guidance is that entities should recognize the assets and liabilities that arise from leases.

Topic 840 does not apply to leases to explore for or use minerals, oil, natural gas and similar nonregenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained.

In July 2018, the FASB issued ASU No.

2018-11, “Leases (Topic 842):

Targeted Improvements”, which provides entities with an alternative modified transition method to elect not to recast the comparative periods presented when adopting Topic 842.

The Company adopted Topic 842 as of January 1, 2019, using the alternative modified transition method, for which, comparative periods, including the disclosures related to those periods, are not restated.

In addition, the Company elected practical expedients provided by the new standard whereby, the Company has elected to not reassess its prior conclusions about lease identification, lease classification, and initial direct costs and to retain off-balance sheet treatment of short-term leases (i.e., 12 months or less and does not contain a purchase option that the Company is reasonably certain to exercise).

Refer to “Note 10 - Commitments and Contingencies” to our consolidated financial statements included in Item 1.

of this Quarterly Report on Form 10-Q for additional information.

In March 2020, the FASB issued ASU No.

Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

This update provides temporary optional expedients and exceptions to U.S.

GAAP on contract modifications, hedging relationships, and other transactions affected by reference rate reform to ease entities’ financial reporting burdens as the market transitions from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates.

The guidance was effective upon issuance and may be applied prospectively to contract modifications made, hedging relationships entered into, and other transactions affected by reference rate reform, evaluated on or before December 31, 2022, beginning during the reporting period in which the guidance has been elected.

Management is currently evaluating the impact of this update, but does not expect this update to have a material impact on the Company’s financial statements.

Liquidity and capital resources

As of March 31, 2022, the company had cash and cash equivalents of $ 4,406,800 and availability under its Revolving Credit Facility (see Note 5 — Long-Term Debt) of $ 1,459,383 .

Based on projections of growth in revenue and operating results in the coming year, the available cash held by us and availability under our Revolving Credit Facility, the Company believes that it will have sufficient cash resources to finance its operations and service any maturing debt obligations for at least the next twelve months following the issuance of these financial statements.

As of June 30, 2022, the Company had cash and cash equivalents of $ 4,915,815 and availability under its Revolving Credit Facility (see Note 5 — Long-Term Debt) of $ 1,892,183 .

resources to finance our operations and service any maturing debt obligations for at least the next twelve months following the issuance of these financial statements.

Note 3 — Intangible Assets

4 unchanged sentences

The Company records amortization expense on a straight-line basis over the life of the identifiable intangible assets.

For the three months ended March 31, 2022 and 2021, amortization expense of $ 488,455 and $ 488,455 , respectively, was recognized, and as of March 31, 2022 and December 31, 2021, intangible assets net of accumulated amortization was $ 15,103,123 and $ 15,591,578 , respectively.

Intangible assets and the related accumulated amortization and future amortization expense are as follows:

For the three months ended June 31, 2022 and 2021, amortization expense of $ 488,455 and $ 488,455 , respectively, and for the six months ended June 30, 2022 and 2021, amortization expense of $ 976,909 and $ 976,909 , respectively, was recognized, and as of June 30, 2022 and December 31, 2021, intangible assets net of accumulated amortization was $ 14,614,669 and $ 15,591,578 , respectively.

As of June 30, 2022, intangible assets and the related accumulated amortization, weighted-average remaining life and future amortization expense are as follows:

Trademarks and

4 unchanged sentences

( 3,419,181 )

Intangibles, net as of March 31, 2022

Intangibles, net

Estimated life (years)

Weighted-average remaining life (years) at March 31, 2022

Weighted-average remaining life (years)

The Company expects to deduct goodwill for tax purposes in future years.

7 unchanged sentences

Total accrued liabilities

As of March 31, 2022, accrued expenses includes $ 3,962,162 related to the partial redemption of common units issued in connection with the acquisition of Orange142 (See Note 9 — Stockholders’ / Members’ Equity).

As of June 30, 2022, accrued expenses includes $ 3,962,162 related to the partial redemption of common units issued in connection with the acquisition of Orange142 (See Note 9 — Stockholders’ / Members’ Equity (Deficit) and Stock-Based Compensation Plans).

On July 28, 2022, the Company paid the $ 3,962,162 plus $ 36,473 of accrued interest in connection with the Second Amendment to the Redemption Agreement (the “Redemption Agreement Amendment”).

(See Note 14 – Subsequent Events).

On July 10, 2019, Huddled Masses was named as a defendant in a lawsuit related to a delinquent balance to a vendor.

On July 28, 2022, the Company entered into a settlement agreement with the vendor and agreed to pay a total of $ 515,096 with monthly installment payments of $ 21,500 over 24 months beginning September 1, 2022.

(See Note 14 – Subsequent Events) .

Note 5 — Long-Term Debt

1 unchanged sentence

On September 30, 2020, the Company entered into a credit agreement that provides for a revolving credit facility with East West Bank in the amount of $ 4,500,000 with an initial availability of $ 1,000,000 (the “Revolving Credit Facility”).

On December 17, 2021, the Company amended the Revolving Credit Facility, which increased the amount of the revolving loan to $ 5,000,000 with an initial

availability of $ 2,500,000 .

The loans under the Revolving Credit Facility bear interest at the LIBOR rate plus 3.5 % per annum, and at March 31, 2022 and December 31, 2021, the rate was 7.6 % and 7.0 %, respectively, with a 0.50 % per annum unused line fee.

On December 17, 2021, the Company amended the Revolving Credit Facility, which increased the amount of the revolving loan to $ 5,000,000 with an initial availability of $ 2,500,000 .

The loans under the Revolving Credit Facility bear interest at the LIBOR rate plus 3.5 % per annum, and at June 30, 2022 and December 31, 2021, the rate was 8.3 % and 7.0 %, respectively, with a 0.50 % unused line fee.

We expect that interest rates applicable to the Revolving Credit Facility will be modified upon the implementation of a LIBOR replacement rate that will apply to our current and future borrowings.

1 unchanged sentence

All accrued but unpaid interest under the Revolving Credit Facility is payable in monthly installments on each interest payment date until the maturity date when the outstanding principal balance, together with all accrued but unpaid interest will be due.

In connection with the amendment, the Company incurred additional deferred financing fees of $ 63,689 in 2021 and $ 4,613 during the three months ended March 31, 2022.

As of March 31, 2022 and December 31, 2021, the Company had outstanding borrowings under the Revolving Credit Facility of $ 400,000 and $ 400,000 , respectively, and deferred financing cost of $ 66,869 and $ 96,152 , respectively, which are classified as an asset on the consolidated balance sheets.

The Revolving Credit Facility is secured by senior liens on all or substantially all of the assets of DDH LLC and its subsidiaries, including a priority lien on the trade accounts receivable of DDH LLC and its subsidiaries.

The Revolving Credit Facility includes financial covenants, and as of March 31, 2022 and December 31, 2021, the Company was in compliance with all of its financial covenants.

In connection with the amendment, the Company incurred additional deferred financing fees of $ 4,613 during the six months ended June 30, 2022.

As of June 30, 2022 and December 31, 2021, the Company had outstanding borrowings under the Revolving Credit Facility of $ 400,000 and $ 400,000 , respectively, and deferred financing cost of $ 33,434 and $ 96,152 , respectively, which are classified as an asset on the consolidated balance sheets.

On July 26, 2022, the Company paid the outstanding balance of $ 400,000 plus accrued interest and terminated the Revolving Credit Facility.

(See Note 14 - Subsequent Events).

The Revolving Credit Facility is secured by the trade accounts receivable of DDH LLC and guaranteed by the Company.

The Revolving Credit Facility includes financial covenants, and as of June 30, 2022 and December 31, 2021, the Company was in compliance with all of its financial covenants.

The components of interest expense and related fees for the lines of credit are as follows:

For the Three Months

For the Six Months

Interest expense – East West Bank

1 unchanged sentence

Total interest expense and amortization of deferred financing costs

Accrued and unpaid interest as of March 31, 2022 and December 31, 2021 for the Revolving Credit Facility was $ 5,750 and $ 5,553 , respectively, related to the unused line fee.

Accrued and unpaid interest as of June 30, 2022 and December 31, 2021 for the Revolving Credit Facility was $ 5,814 and $ 5,553 , respectively, related to the unused line fee.

2020 Term Loan Facility and 2021 Credit Facility

In conjunction with the acquisition of Orange142 on September 30, 2020, the Company entered into a loan and security agreement (the “2020 Term Loan Facility”) with SilverPeak in the amount of $ 12,825,000 , maturing on September 15, 2023.

In conjunction with the acquisition of Orange142 on September 30, 2020, the Company entered into a loan and security agreement (the “2020 Term Loan Facility”) with SilverPeak Credit Partners, LP (“Silverpeak”) in the amount of $ 12,825,000 , maturing on September 15, 2023.

Interest in year one was 15 %, of which 12 % was payable monthly and 3 % was paid-in-kind (“PIK”).

All accrued but unpaid interest under the 2020 Term Loan Facility was payable in monthly installments on each interest payment date, and the Company was required to repay the outstanding principal balance on January 15 and July 15 of each calendar year in an amount equal to 37.5 % of excess cash flow over the preceding six calendar months until the term loan was paid in full.

The remaining principal balance, and all accrued but unpaid interest were to be due on the maturity date.

The remaining principal balance, and all accrued but unpaid interest was to be due on the maturity date.

The obligations under the 2020 Term Loan Facility were secured by first-priority liens on all or substantially all assets of DDH LLC and its subsidiaries.

2 unchanged sentences

indebtedness, liens, investments, acquisitions, dispositions, and restricted payments.

Each of Mark Walker (“Walker”), Chairman of the Board and Chief Executive Officer, and Keith Smith (“Smith”), President, provided limited guarantees of the obligations under the 2020 Term Loan Facility.

Each of Mark Walker

(“Walker”), Chairman of the Board and Chief Executive Officer, and Keith Smith (“Smith”), President, provided limited guarantees of the obligations under the 2020 Term Loan Facility.

The maturity date of the 2020 Term Loan Facility was September 15, 2023;

however, on December 3, 2021, DDH LLC entered into the Term Loan and Security Agreement (the “2021 Credit Facility”) with Lafayette Square and used the proceeds to repay and terminate the 2020 Term Loan Facility.

however, on December 3, 2021, DDH LLC entered into the Term Loan and Security Agreement (the “2021 Credit Facility”) with Lafayette Square Loan Servicing, LLC (“Lafayette Square”) and used the proceeds to repay and terminate the 2020 Term Loan Facility.

Lafayette Square

On December 3, 2021, DDH LLC entered into the 2021 Credit Facility with Lafayette Square as administrative agent, and the various lenders thereto.

The term loan under the 2021 Credit Facility provides for a term loan in the principal amount of up to $ 32,000,000 , consisting of a $ 22,000,000 closing date term loan and an up to $ 10,000,000 delayed draw term loan.

The loans under the

2021 Credit Facility bear interest at LIBOR plus the applicable margin minus any applicable impact discount.

The loans under the 2021 Credit Facility bear interest at LIBOR plus the applicable margin minus any applicable impact discount.

The applicable margin under the 2021 Credit Facility is determined based on the consolidated total net leverage ratio of the Company and its consolidated subsidiaries, at a rate of 6.50 % per annum if the consolidated total net leverage ratio is less than 2.00 to 1.00 and up to 9.00 % per annum if the consolidated total net leverage ratio is greater than 4.00 to 1.00.

2 unchanged sentences

The maturity date of the 2021 Credit Facility is December 3, 2026.

The obligations under the 2021 Credit Facility are secured by senior liens on all or substantially all assets of DDH LLC and its subsidiaries and are guaranteed by the subsidiaries of DDH LLC.

On July 28, 2022, the Company entered into the Second Amendment and Joinder to Term Loan and Security Agreement (the “Term Loan Amendment”) and received proceeds of $ 4,260,000 borrowed under the Delayed Draw Loan to pay the balance owed on the common unit redemption (See Note 4 – Accrued Liabilities) as well as costs associated with the transaction.

The Company also amended certain covenants and quarterly payment requirements under the 2021 Credit Facility.

(See Note 14 - Subsequent Events).

The obligations under the 2021 Credit Facility are secured by senior, first-priority liens on all or substantially all assets of DDH LLC and its subsidiaries and are guaranteed by the subsidiaries of DDH LLC and include a pledge and guarantee by the Company.

The 2021 Credit Facility is subject to an intercreditor agreement pursuant to which the lenders under the Revolving Credit Facility have a priority lien on the trade accounts receivable of DDH LLC and its subsidiaries that constitute eligible accounts under the Revolving Credit Facility and related proceeds, and the lenders under the 2021 Credit Facility have a priority lien on all other collateral.

In connection with the entry into the 2021 Credit Facility, we paid off in full and terminated the 2020 Term Loan Facility.

As of March 31, 2022, the Company owed a balance on the 2021 Credit Facility of $ 21,862,500 .

Financing costs incurred in the transaction were initially $ 2,127,185 in 2021 and additional fees of $ 180,480 for the three months ended March 31, 2022.

Unamortized deferred financing costs as of March 31, 2022 and December 31, 2021 were $ 2,153,821 and $ 2,091,732 , respectively.

Accrued and unpaid interest was $ 0 as of March 31, 2022 and December 31, 2021.

As of June 30, 2022, the Company owed a balance on the 2021 Credit Facility of $ 21,725,000 .

Financing costs incurred in the transaction were initially $ 2,127,185 in 2021 and additional fees of $ 180,480 were incurred for the six months ended June 30, 2022.

Unamortized deferred financing costs as of June 30, 2022 and December 31, 2021 were $ 2,038,438 and $ 2,091,732 , respectively.

Accrued and unpaid interest was $ 0 as of June 30, 2022 and December 31, 2021.

The components of interest expense and related fees for the 2020 Term Loan Facility and 2021 Credit Facility are as follows:

For the Three Months

For the Six Months

Interest expense – SilverPeak

8 unchanged sentences

The Company received the loan proceeds of $ 150,000 on June 15, 2020.

The loan bears interest at a rate of 3.75 % and matures on June 15, 2050.

bears interest at a rate of 3.75 % and matures on June 15, 2050.

Installment payments, including principal and interest, of $ 731 will be payable monthly beginning June 15, 2022.

1 unchanged sentence

The loan is secured by substantially all assets of DDH LLC.

Accrued and unpaid interest expense as of March 31, 2022 and December 31, 2021 was $ 10,031 and $ 8,648 , respectively, and is included in accrued expenses on the consolidated balance sheets.

Accrued and unpaid interest expense as of June 30, 2022 and December 31, 2021 was $ 11,428 and $ 8,647 , respectively, and is included in accrued expenses on the consolidated balance sheets.

Paycheck Protection Program

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The forgiveness amount will be reduced if the borrower terminates employees or reduces salaries and wages more than 25% during the covered period.

Any unforgiven portion is payable over two years if issued before, or five years if issued after, June 5, 2020 at an

interest rate of 1.0% with payments deferred until the SBA remits the borrower’s loan forgiveness amount to the lender, or if the borrower does not apply for forgiveness, then months after the end of the covered period.

Any unforgiven portion is payable over two years if issued before, or five years if issued after, June 5, 2020 at an interest rate of 1.0 % with payments deferred until the SBA remits the borrower’s loan forgiveness amount to the lender, or if the borrower does not apply for forgiveness, then months after the end of the covered period.

DDH LLC received the PPP-1 Loan proceeds of $ 287,100 on May 8, 2020.

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In March 2021, DDH LLC applied for and received another PPP loan (the “PPP-2 Loan”) for a principal amount of $ 287,143 and there are no collateral or guarantee requirements.

Under the terms of the PPP-2 Loan, monthly payments of $ 6,440 are due starting June 11, 2022, and the loan bears interest at 1 % per annum and matures on March 11, 2026.

On April 11, 2022, the Company received notification that its PPP Loan of $ 287,143 was fully forgiven.

As of March 31, 2022, future minimum payments related to long-term debt is as follows for the years ended December 31:

On April 11, 2022, the balance on the PPP-2 Loan was forgiven.

As of June 30, 2022, future minimum payments related to long-term debt is as follows for the years ended December 31:

Less current portion

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Under ASC 480, mandatorily redeemable financial instruments shall be measured initially at fair value.

In connection with the acquisition of Orange142, DDH LLC issued mandatorily redeemable preferred units which are only redeemable for a fixed amount of cash at a date specific to each class.

In connection with the acquisition of Orange142, DDH LLC issued mandatorily redeemable preferred units that are only redeemable for a fixed amount of cash at a date specific to each class.

Due to the mandatory redemption feature, ASC 480 requires that these preferred units be classified as a liability rather than as a component of equity, with preferred annual returns being accrued and recorded as interest expense.

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In connection with the Orange142 acquisition, DDH LLC issued 3,500 non-voting Class A Preferred Units at a purchase price of $ 3,500,000 , and a fair value of $ 3,458,378 .

Class A Preferred Units were entitled to certain approval rights and were mandatorily redeemable for $ 3,500,000 on September 30, 2022, with 10 % preferred annual returns paid on a quarterly basis.

Class A Preferred Units were entitled to certain approval rights and were mandatorily

redeemable for $ 3,500,000 on September 30, 2022, with 10 % preferred annual returns paid on a quarterly basis.

Due to the mandatory redemption feature, ASC 480, requires that the Class A Preferred Units be classified as a liability rather than as a component of equity, with the preferred annual returns being accrued and recorded as interest expense.

In December 2021, DDH LLC redeemed the Class A Preferred Units and recognized a loss on the redemption of $ 41,622 in connection with the write-off of the fair value associated with the units.

For the three months ended March 31, 2021, the Company recorded interest expense relating to the Class A Preferred Units of $ 86,301 .

For the six months ended June 30, 2021, the Company recorded interest expense relating to the Class A Preferred Units of $ 173,562 .

Class B Preferred Units

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In February 2022, DDH LLC redeemed the Class B Preferred Units and recognized a loss on the redemption of $ 590,689 in connection with the write-off of the fair value associated with the units.

For the three months ended March 31, 2022 and March 31, 2021, the Company recorded interest expense relating to the Class B Preferred Units of $ 62,162 and $ 121,620 , respectively.

The Company recorded interest expense relating to the Class B Preferred Units of $ 0 and $ 122,972 , for the three months ended June 30, 2022 and 2021, respectively and $ 62,162 and $ 244,592 for the six months ended June 30, 2022 and 2021, respectively.

Note 7 — Related Party Transactions

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Member Payable

As of December 31, 2021, the Company had a net payable to members that totaled $ 70,801 pertaining to loans made to the Company by its founding members Walker and Smith during fiscal 2020.

This remaining balance owed was paid to the members as of March 31, 2022.

As of December 31, 2021, the Company had a net payable to members that totaled $ 70,801 pertaining to loans made to the Company by its founding members Walker and Smith during the fiscal year ending December 31, 2020.

This remaining balance owed was paid to the members as of June 30, 2022.

Up-C Structure

In February 2022, the Company completed an initial public offering of its securities, and through the Organizational Transaction, formed an Up-C structure, which is often used by partnership and limited liability companies and allows DDH, the Continuing LLC Owner, a Delaware limited liability company indirectly owned by Walker and Smith, to retain its equity ownership in DDH LLC and to continue to realize tax benefits associated with owning interests in an entity that treated as a partnership, or “passthrough” entity, for U.S.

federal income tax purposes.

The Continuing LLC owner will hold economic nonvoting LLC Units in DDH LLC and will also hold noneconomic voting equity interests in the form of the Class B common stock in Direct Digital Holdings (See Note 9 – Stockholders’/Members’ Equity (Deficit and Stock-Based Compensation Plans).

One of the tax benefits to the Continuing LLC Owner associated with this structure is that future taxable income of DDH LLC that is allocated to the Continuing LLC Owner will be taxed on a pass-through basis and therefore will not be subject to corporate taxes at the entity level.

Additionally, the Continuing LLC Owner may, from time to time, redeem or exchange its LLC Units for shares of our Class A common stock on a one -for-one basis.

The Up-C structure also provides the Continuing LLC Owner with potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded.

If we ever generate sufficient taxable income to utilize the tax benefits, Digital Direct Holdings expects to benefit from the Up-C structure because, in general, we expect cash tax savings in amounts equal to 15 % of certain tax benefits arising from such redemptions or exchanges of the Continuing LLC Owner's LLC Units for Class A common stock or cash and certain other tax benefits covered by the TRA.

(See Note 12 - Tax Receivable Agreement and Income Taxes).

Board Services and Consulting Agreement

On September 30, 2020, the Company entered into board services and consulting agreements with Walker, Smith and Leah Woolford (“Woolford”).

Walker, Smith and Woolford were then all members of the Company.

Walker, Smith and Woolford were then all members of DDH LLC.

Prior to the Organizational Transactions, Walker served as a Manager on the Board of Managers of DDH LLC, and now serves as Chairman of the Board of Directors and Chief Executive Officer of the Company.

Prior to the Organizational Transactions, Smith served as a Manager on the Board of Managers of DDH LLC and now serves as a director on the Board of Directors and President of the Company.

Woolford previously served as a Manager on the Board of Managers of DDH LLC and Senior Advisor of DDH LLC.

Woolford previously served as a

Manager on the Board of Managers of DDH LLC and Senior Advisor of DDH LLC.

In exchange for these services, the Company paid Walker and Smith annual fees of $ 450,000 each and employee benefits for their direct families.

The Company paid Woolford $ 300 per hour for up to 50 hours per month and employee benefits for Woolford and her direct family.

In connection with the Organizational Transactions, the consulting agreements were canceled, and for the three months ended March 31, 2022, total fees paid to Walker, Smith and Woolford were $ 56,250 , $ 56,250 and $ 22,500 , respectively.

For the three months ended March 31, 2021, total fees paid to Walker, Smith and Woolford were $ 103,846 , $ 103,846 , and $ 45,000 , respectively.

In connection with the Organizational Transactions, the consulting agreements were canceled, and for the three months ended June 30, 2022 and 2021, total fees paid to Walker, Smith and Woolford were $ 0 , $ 0 and $ 0 , and $ 121,154 , $ 121,154 , and $ 45,000 , respectively.

For the six months ended June 30, 2022 and 2021, total fees paid to Walker, Smith and Woolford were $ 56,250 , $ 56,250 and $ 22,500 and $ 225,000 , $ 225,000 , and $ 90,000 , respectively.

Note 8 — Commitments and Contingencies

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The matter is currently underway, and the Company has estimated a potential liability of approximately $ 501,078 .

Such liability has been recorded and included in accrued liabilities on the consolidated balance sheets as of March 31, 2022 and December 31, 2021.

The Company entered into mediation discussions beginning April 2021.

Such liability has been recorded and included in accrued liabilities on the consolidated balance sheets as of June 30, 2022 and December 31, 2021 (See Note 4 – Accrued Liabilities).

On July 28, 2022, the Company entered into a settlement agreement with the vendor and agreed to pay a total of $ 515,096 with minimum monthly installment payments of $ 21,500 over the next 24 months (See Note 14 – Subsequent Events).

In June 2019, the Company entered into a sublease for its corporate office headquarters at 1233 West Loop South, Ste 1170 in Houston, TX.

The lease term expires July 1, 2022, and has a base monthly rent of approximately $ 3,600 per month.

In March 2022, the Company entered into a new lease to move its corporate headquarters to 1177 West Loop South, Ste 1170 in Houston, TX effective July 1, 2022.

In March 2022, the Company entered into a new lease to move its corporate headquarters to 1177 West Loop South, Ste 1310 in Houston, TX effective July 1, 2022, and paid a security deposit of approximately $ 29,000 .

The lease is for 7,397 square feet of office space that expires February 28, 2030.

The base monthly rent varies annually over the term of the lease.

The Company paid a security deposit of approximately $ 29,000 .

The Company also leases office furniture for its corporate headquarters under a lease agreement effective April 2019 and expiring July 2023.

2 unchanged sentences

The lease expires December 31, 2023 and has a base rent of approximately $ 6,700 per month.

For the three months ended March 31, 2022 and 2021, the Company incurred rent expense of $ 51,378 and $ 50,171 , respectively, for the combined leases.

Supplemental cash flow information related to the Company’s operating lease is included in the table below for the three months ended March 31, 2022:

Cash paid for amounts included in the measurement of lease liabilities

Supplemental balance sheet information related to operating leases is included in the table below for the year ended March 31, 2022:

For the three months ended June 30, 2022 and 2021, the Company incurred rent expense of $ 52,183 and $ 63,272 , respectively, for the combined leases.

For the six months ended June 30, 2022 and 2021, the Company incurred rent expense of $ 103,561 and $ 113,443 , respectively, for the combined leases.

Supplemental balance sheet information related to operating leases is included in the table below for the year ended June 30, 2022:

Operating lease - right-of-use asset

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Total lease liability

The weighted-average remaining lease term for the Company’s operating lease is seven years as of ended March 31, 2022, with a weighted-average discount rate of 8 %:

The weighted-average remaining lease term for the Company’s operating lease is seven years as of ended June 30, 2022, with a weighted-average discount rate of 8 %.

Lease liability with enforceable contract terms that have greater than one-year terms are as follows:

2 unchanged sentences

Total lease liability

Note 9 — Stockholders’ / Members’ Equity (Deficit)

Note 9 — Stockholders’ / Members’ Equity (Deficit) and Stock-Based Compensation Plans

Members’ Equity

7 unchanged sentences

Stockholders’ Equity – Initial Public Offering

Following the completion of the Organizational Transactions, DDH LLC’s limited liability company agreement was amended and restated to, among other things, appoint the Company as the sole managing member of DDH LLC and effectuate a recapitalization of all outstanding preferred units and common units into (i) economic nonvoting units of DDH LLC held by the Company and, through their indirect ownership of Direct Digital Management, LLC, our Chairman and Chief Executive Officer and our President, and (ii) noneconomic voting units of DDH LLC, 100 % of which are held by the Company.

Following the completion of the Organizational Transactions, DDH LLC’s limited liability company agreement was amended and restated to, among other things, appoint the Company as the sole managing member of DDH LLC and effectuate a recapitalization of all outstanding preferred units and common units into (i) economic nonvoting units of DDH LLC held by the Company and, through their indirect ownership of DDM, our Chairman and Chief Executive Officer and our President, and (ii) noneconomic voting units of DDH LLC, 100 % of which are held by the Company.

As of June 30, 2022, DDM held 11,378,000 shares of Class B common stock.

The Company is authorized to issue 160,000,000 shares of Class A common stock, par value $ 0.001 per share, 20,000,000 shares of Class B common stock, par value $ 0.001 per share, and 10,000,000 shares of preferred stock, par value $ 0.001 per share.

2 unchanged sentences

The shares of Class A Common Stock and warrants may be transferred separately immediately upon issuance.

The underwriters, in our initial public offering, were granted a 45 -day option to purchase up to an additional 420,000 shares and/or warrants, or any combination thereof, to cover over-allotments, which they initially exercised, in part, and elected to purchase warrants which have the same terms as those issued in the initial public offering, to purchase an additional 420,000 shares of Class A Common Stock.

At June 30, 2022, 2,800,000 of these warrants are outstanding and the intrinsic value of these warrants is $ 0 .

The underwriters in our initial public offering were granted a 45 -day option to purchase up to an additional 420,000 shares and/or warrants, or any combination thereof, to cover over-allotments, which they initially exercised, in part, electing to purchase warrants to purchase an additional 420,000 shares of Class A Common Stock.

As of June 30, 2022, 420,000 of these warrants are outstanding.

In connection with our initial public offering, we issued to the underwriters of the offering a unit purchase option to purchase (i) an additional 140,000 Units at a per Unit exercise price of $ 6.60 , which was equal to 120 % of the public offering price per Unit sold in the initial public offering, and (ii) warrants to purchase 21,000 shares of Class A Common Stock at a per warrant exercise price of $ 0.012 , which was equal to 120 % of the public offering price per warrant sold in the offering.

1 unchanged sentence

The Units were sold at a price of $ 5.50 per Unit, and the net proceeds from the offering were $ 10,167,043 , after deducting underwriting discounts and commissions and offering expenses payable by the Company.

The Company recorded offering expenses in accounts payable and accrued liabilities of $ 1,137,025 as of March 31, 2022 and intends to pay these amounts throughout the remainder of 2022.

DDH LLC used the proceeds, together with pre-existing cash and cash equivalents, to purchase all of the remaining 5,637 common units and 7,046 Class B Preferred Units held indirectly by Woolford for an aggregate purchase price of $ 14,246,251 , of which $ 10,284,089 was paid on the closing date of the initial public offering, and $ 3,962,162 was recorded in accrued liabilities in the consolidated balance sheets as of March 31, 2022.

The Company intends to pay the remainder of the purchase price to the entity controlled by Woolford during the first half of 2022.

The warrants have a fair value of $ 0 that was calculated using the Black-Scholes option -pricing model.

The offering expenses recorded in accounts payable and accrued liabilities are approximately $ 1,045,000 as of June 30, 2022, and the Company intends to pay these amounts

throughout the remainder of 2022.

DDH LLC used the proceeds, together with pre-existing cash and cash equivalents, to purchase all of the remaining 5,637 common units and 7,046 Class B Preferred Units held indirectly by Woolford for an aggregate purchase price of approximately $ 14,246,251 , of which $ 10,284,089 was paid on the closing date of the initial public offering, and $ 3,962,162 was recorded in accrued liabilities in the consolidated balance sheets as of June 30, 2022 (See Note 4 – Accrued Liabilities).

On July 28, 2022, the Company paid the remainder of the purchase price.

(See Note 14 - Subsequent Events).

The warrants had a fair value of $ 0 that was calculated using the Black-Scholes option -pricing model.

Variables used in the Black-Scholes option-pricing model include:

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Treasury bill rate, (2) expected life of 5 years, (3) expected volatility of approximately 66 % based on the trading history of similar companies, and (4) zero expected dividends.

The following table summarizes warrant activity during the three months ended March 31, 2022:

The following table summarizes warrant activity as of June 30, 2022:

Weighted Average

Contractual Term

Number of Shares

Weighted Average

Contractual Life

Exercise Price

Intrinsic Value

Outstanding at January 1, 2022

Warrants granted

Warrants exercised

Warrants canceled

Outstanding at March 31, 2022

Exercisable at March 31, 2022

Note 10 — Loss Per Share / Unit

Basic loss per share / unit is calculated by dividing the net loss for the year by the weighted average number of share / unit outstanding during the period.

The Company does not have any dilutive share / unit, and therefore the diluted weighted average number of share / unit outstanding are equal to the basic weighted average number of share / unit.

Outstanding at June 30, 2022

Exercisable at June 30, 2022

Stock-Based Compensation Plans

In connection with our IPO, the Company adopted the 2022 Omnibus Incentive Plan (“2022 Omnibus Plan”) to facilitate the grant of equity awards to our employees, consultants and non-employee directors.

The 2022 Omnibus Plan reserved 1,500,000 shares of Class A common stock for issuance in equity awards.

On June 10, 2022, our board of directors granted 264,850 stock options and 363,614 RSUs to employees and non-employee directors.

The Company recognized $ 15,407 of stock-based compensation in the consolidated statement of operations related to the June 10, 2022 awards granted.

Stock Options

Options to purchase shares of common stock vest annually on the grant date anniversary over a period of three years and expire 10 years following the date of grant.

The following table summarizes the stock option activity under the 2022 Omnibus Plan as of June 30, 2022:

Stock Options

Weighted Average

Contractual Life

Exercise Price

Intrinsic Value

Outstanding at January 1, 2022

Outstanding at June 30, 2022

Exercisable at June 30, 2022

As of June 30, 2022, all stock options remain unvested with related unamortized stock-based compensation expense totaling $ 252,938 and the weighted-average period over which such stock-based compensation expense will be recognized is 2.95 years.

Restricted Stock Units

Under the 2022 Omnibus Plan, the Company granted RSUs to all of its employees and non-employee directors.

The RSUs vest annually on the grant date anniversary over a period of three years .

A summary of RSU activity and related information is as follows:

Restricted Stock Units

Weighted Average

Grant Date Fair Value

Number of Shares

Unvested- December 31, 2021

Unvested- June 30, 2022

As of June 30, 2022, unrecognized stock-based compensation of $ 577,124 related to unvested RSUs will be recognized on a straight- line basis over a period of 2.95 years.

Note 10 — Income Per Share / Unit

The computation of basic and diluted income per share/ unit is as follows.

The Company does not have any dilutive shares / units, and therefore the diluted weighted average number of shares / units outstanding are equal to the basic weighted average number of shares / units.

For the Three Months Ended

Net income loss per unit attributable to stockholders / members

Number of units outstanding at the beginning of the period

For the Six Months Ended

Net income per unit attributable to stockholders/members

Weighted average shares / units outstanding at the beginning of the period

Weighted average Class A and Class B shares issued during the period

1 unchanged sentence

Number of shares / units outstanding at the end of the period, basic and diluted

Net loss per shares / unit, basic and diluted

Net income per share / unit, basic and diluted

Note 11 — Employee Benefit Plans

1 unchanged sentence

The Company matches employee contributions up to a maximum of 100 % of the participant’s salary deferral, limited to 4 % of the employee’s salary.

For the three months ended March 31, 2022 and 2021, the Company matching contributions were $ 50,561 and $ 36,715 , respectively.

For the three and six months ended June 31, 2022 and 2021, the Company matching contributions were $ 52,501 and $ 40,677 , respectively and $ 103,062 and $ 77,392 , respectively.

Additionally, the Company may make a discretionary profit- sharing contribution to the Plan.

During the three months ended March 31, 2022 and 2021, no profit-sharing contributions were made.

During the three and six months ended June, 2022 and 2021, no profit-sharing contributions were made.

The Company has an Employee Benefit Plan Trust (the “Trust”) to provide for the payment or reimbursement of all or a portion of covered medical, dental and prescription expenses.

1 unchanged sentence

The self-funded plan has an integrated stop loss insurance policy for the funding of the Trust benefits in excess of the full funding requirements.

As of March 31, 2022 and December 31, 2021, the Company analyzed the incurred but not reported claims and records an estimated liability if needed.

As of June 30, 2022 and December 31, 2021, the Company analyzed the incurred but not reported claims and recorded an estimated liability, as required.

Note 12 — Tax Receivable Agreement and Income Taxes

Tax Receivable Agreement

In connection with our initial public offering in February 2022, the Company entered into a TRA with DDH LLC and DDM (“TRA Holders”) which provides for payment by Direct Digital Holdings, Inc.

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 Direct Digital Holdings, Inc.

actually realizes or is deemed to realize in certain circumstances.

Direct Digital Holdings, Inc.

will retain the benefit of the remaining 15 % of these net cash savings, and as a result, Direct Digital Holdings, Inc.

recorded $ 485,100 as additional paid-in capital.

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 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, 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.

The Company plans to make an election under Section 754 if the Code for each taxable year in which a redemption or exchange of LLC interest occurs.

As of June 30, 2022, no redemptions or exchanges have been made by the members of DDH, LLC.

As of June 30, 2022, Direct Digital Holdings, Inc.

recognized a deferred tax asset from the outside basis difference in the partnership interest of $ 3,234,000 , and reconized the total TRA liability of $ 2,748,900 , with $ 183,260 reflected in current liabilities based on the expected timing of our payments.

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 Direct Digital Holdings, Inc.

We may elect to defer payments due under the TRA if we do not have available cash to satisfy our 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.

We account for any amounts payable under the TRA in accordance with ASC Topic 450, Contingencies, and will recognize subsequent period changes to the measurement of the liability from the TRA in the statement of operations as a component of income before taxes.

The term of the TRA commenced upon completion of our IPO and will continue until all tax benefits that are subject to the TRA have been utilized or expired, unless we exercise our right to terminate the TRA.

If we elect to terminate the TRA early (or it is terminated early due to changes in control), our obligations under the TRA would accelerate and we would be required to make an immediate payment equal to the present value of the anticipated future payments to be made by us under the TRA.

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 TRA, the Company is subject to corporation income tax on 19.7 % of the taxable income, and as a result, recorded a provision for federal income tax of $ 86,676 for the three months ended June 30, 2022.

In the fiscal year ending December 31, 2021, the Company was treated as a partnership, and therefore no income tax expense was recognized.

Provision for income taxes consisted of:

For the Three Months Ended

For the Six Months Ended

Total provision for income taxes

The components of deferred tax assets are as follows:

Outside basis difference in partnership interests in DDH, LLC

Total deferred income taxes

The effective tax rate for the three and six months ended June 30, 2022, was approximately 22%.

Under the Up-C ownership structure, the Company calculates taxable income as 19.7% of consolidated net income, adjusted for temporary and permanent tax differences.

The Company has recorded deferred tax assets for the outside basis difference in the partnership interest acquired in DDH, LLC and the accumulated amortization related to intangibles.

Note 13 — Segment Information

5 unchanged sentences

For the Three Months

For the Six Months

Buy-side advertising

1 unchanged sentence

Total revenues

Operating income (loss) by business segment is as follows:

Operating income (loss) by business segment reconciled to income before taxes is as follows:

For the Three Months

For the Six Months

Buy-side advertising

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( 1,707,313 )

Consolidated operating income (loss)

( 2,847,695 )

( 1,276,668 )

Total operating income

Corporate other expense

( 1,619,602 )

( 1,589,749 )

Income before taxes

Total assets by business segment are as follows:

3 unchanged sentences

Note 14 — Subsequent Events

The Company has evaluated events and transactions occurring subsequent to March 31, 2022 through the date of this report and determined there were no events or transactions that would impact the consolidated financial statements for the three months ended March 31, 2022.

On April 11, 2022, the Company received notification that its PPP Loan of $ 287,143 was fully forgiven.

On July 26, 2022, the Company repaid the $ 400,000 that was outstanding pursuant to the Revolving Credit Facility and terminated the Revolving Credit Facility as of such date.

On July 28, 2022, the Company entered into the Term Loan Amendment with DDH LLC, Colossus Media, Huddled Masses, Orange142, Universal Standards for Digital Management, LLC (“USDM, LLC”), Lafayette Square, and the Lenders party thereto, pursuant to which the Company was joined as a guarantor of the obligations under the 2021 Credit Facility.

Pursuant to the Term Loan Amendment, DDH LLC will indemnify the Company from and against any claims, losses, expenses and other liabilities incurred by the Company arising from the Company’s guarantor obligations under the 2021 Credit Facility and related term loan documents.

Additionally, under the Term Loan Amendment, DDH LLC borrowed $ 4,260,000 as the Delayed Draw Loan.

The Delayed Draw Loan is required to be repaid in quarterly installments payable on the last day of each fiscal quarter in an amount equal to (i) commencing with the fiscal quarter ending December 31, 2022 through and including the fiscal quarter ending December 31, 2023, $ 26,250 , and (ii) commencing March 31, 2024 and continuing on the last day of each fiscal quarter thereafter, $ 52,500 , with a final installment due December 3, 2026 in an amount equal to the remaining entire principal balance thereof.

After giving effect to the Delayed Draw Loan on the effective date of the Term Loan Amendment, no additional delayed draw loans will be available under the 2021 Credit Facility.

On July 28, 2022, DDH LLC entered into the Redemption Agreement Amendment with USDM Holdings, Inc.

that amends the previously disclosed Redemption Agreement by and between DDH LLC and USDM Holdings, Inc., dated as of November 14, 2021 (the “Original Redemption Agreement”), as amended by the Amendment to Redemption Agreement dated as of February 15, 2022.

The Redemption Agreement Amendment, among other things, amends the remainder of the principal and interest for the Common Units Redemption Price (as defined in the Original Redemption Agreement) to be $ 3,998,635 .

Pursuant to the terms of the Redemption Agreement Amendment, proceeds of the Delayed Draw Loan were used to repay the outstanding balance and related expenses of the Original Redemption Agreement, as well as other transaction costs.

On July 28, 2022, the Company entered into a litigation settlement agreement with a vendor and agreed to pay a total of $ 515,096 with monthly installment payments of $ 21,500 over 24 months beginning September 1, 2022.

(See Note 4 – Accrued Liabilities and Note 8 – Commitments and Contingencies).

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements