Direct Digital Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2022 December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ASSETS ​ ​ ​ CURRENT ASSETS ​ ​ ​ Cash and cash equivalents $ 7,010,796 ​ $ 4,684,431 ​ Accounts receivable, net 21,388,531 ​ 7,871,181 ​ Prepaid expenses and other current assets 696,486 ​ 1,225,447 ​ Total current assets 29,095,813 ​ 13,781,059 ​ ​ ​ ​ ​ ​ ​ ​ ​ Goodwill ​ 6,519,636 ​ 6,519,636 ​ Intangible assets, net (Note 3) ​ 14,126,214 ​ 15,591,578 ​ Deferred tax asset, net (Note 12) ​ ​ 3,160,054 ​ ​ — ​ Deferred financing costs, net ​ — ​ 96,152 ​ Operating lease right-of-use assets ​ 840,505 ​ — ​ Other long-term assets ​ 58,279 ​ 11,508 ​ Total assets ​ $ 53,800,501 ​ $ 35,999,933 ​ ​ ​ ​ ​ ​ ​ ​ ​ LIABILITIES AND STOCKHOLDERS’ / MEMBERS' EQUITY (DEFICIT) ​ ​ ​ ​ ​ CURRENT LIABILITIES: ​ ​ ​ ​ ​ Accounts payable ​ $ 16,718,342 ​ $ 6,710,015 ​ Accrued liabilities ​ 3,599,944 ​ 1,044,907 ​ Current portion of liability related to tax receivable agreement ​ ​ 183,260 ​ ​ — ​ Notes payable, current portion ​ 655,000 ​ 550,000 ​ Deferred revenues ​ 1,146,186 ​ 1,348,093 ​ Operating lease liabilities, current portion ​ 92,473 ​ — ​ Income taxes payable ​ ​ 94,440 ​ ​ — ​ Related party payables (Note 7) ​ — ​ 70,801 ​ Total current liabilities ​ 22,489,645 ​ 9,723,816 ​ ​ ​ ​ ​ ​ ​ ​ ​ Notes payable, net of short-term portion and deferred financing cost of $ 2,250,171 and $ 2,091,732 , respectively ​ 22,942,329 ​ 19,358,268 ​ Mandatorily redeemable non-participating preferred units ​ — ​ 6,455,562 ​ Line of credit ​ — ​ 400,000 ​ Paycheck Protection Program loan ​ — ​ 287,143 ​ Economic Injury Disaster Loan ​ 150,000 ​ 150,000 ​ Liability related to tax receivable agreement, net of current portion ​ ​ 2,451,103 ​ ​ — ​ Operating lease liabilities, net of current portion ​ 767,610 ​ — ​ Total liabilities ​ 48,800,687 ​ 36,374,789 ​ ​ ​ ​ ​ ​ ​ ​ ​ COMMITMENTS AND CONTINGENCIES (Note 8) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ STOCKHOLDERS’ / MEMBERS' EQUITY (DEFICIT) ​ ​ ​ ​ ​ Units, 1,000,000 units authorized at December 31, 2021; 34,182 units issued and outstanding as of December 31, 2021 ​ — ​ 4,294,241 ​ Class A common stock, $ 0.001 par value per share, 160,000,000 shares authorized, 3,260,364 shares issued and outstanding as of September 30, 2022 ​ 3,260 ​ — ​ Class B common stock, $ 0.001 par value per share, 20,000,000 shares authorized, 11,278,000 shares issued and outstanding as of September 30, 2022 ​ 11,278 ​ — ​ Additional paid-in capital ​ 7,817,283 ​ — ​ Accumulated deficit ​ ( 2,832,007 ) ​ ( 4,669,097 ) ​ Total stockholders’ / members' equity (deficit) ​ 4,999,814 ​ ( 374,856 ) ​ Total liabilities and stockholders’ / members' equity (deficit) ​ $ 53,800,501 ​ $ 35,999,933 ​ ​ See accompanying notes to the unaudited consolidated financial statements. ​ 3 Table of Contents DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended ​ For the Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2022 2021 2022 2021 ​ Revenues ​ ​ ​ ​ ​ ​ ​ ​ ​ Buy-side advertising $ 7,130,736 ​ $ 6,033,883 ​ $ 22,283,044 ​ $ 19,975,235 ​ Sell-side advertising 18,854,639 ​ 2,326,862 ​ ​ 36,333,976 ​ ​ 5,261,135 ​ Total revenues 25,985,375 ​ 8,360,745 ​ ​ 58,617,020 ​ ​ 25,236,370 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of revenues ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Buy-side advertising 2,471,170 ​ 2,174,432 ​ ​ 7,694,987 ​ ​ 7,480,727 ​ Sell-side advertising 16,053,461 ​ 1,951,350 ​ ​ 30,344,670 ​ ​ 4,348,756 ​ Total cost of revenues 18,524,631 ​ 4,125,782 ​ ​ 38,039,657 ​ ​ 11,829,483 ​ Gross profit ​ 7,460,744 ​ 4,234,963 ​ ​ 20,577,363 ​ ​ 13,406,887 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Compensation, taxes and benefits 3,845,918 ​ ​ 2,235,066 ​ ​ 9,895,646 ​ ​ 6,131,930 ​ General and administrative 1,770,002 ​ ​ 1,432,985 ​ ​ 5,187,875 ​ ​ 4,214,229 ​ Total operating expenses 5,615,920 ​ ​ 3,668,051 ​ ​ 15,083,521 ​ ​ 10,346,159 ​ Income from operations 1,844,824 ​ ​ 566,912 ​ ​ 5,493,842 ​ ​ 3,060,728 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other income (expense) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other income — ​ ​ — ​ ​ 47,982 ​ ​ 19,186 ​ Forgiveness of Paycheck Protection Program loan ​ — ​ — ​ ​ 287,143 ​ ​ 10,000 ​ Gain from revaluation and settlement of seller notes and earnout liability ​ ​ — ​ ​ — ​ ​ — ​ ​ 21,232 ​ Loss on redemption of non-participating preferred units ​ — ​ — ​ ​ ( 590,689 ) ​ ​ — ​ Interest expense ​ ( 905,605 ) ​ ( 792,400 ) ​ ​ ( 2,269,643 ) ​ ​ ( 2,432,567 ) ​ Total other expense ​ ( 905,605 ) ​ ( 792,400 ) ​ ​ ( 2,525,207 ) ​ ​ ( 2,382,149 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income before taxes ​ ​ 939,219 ​ ​ ( 225,488 ) ​ ​ 2,968,635 ​ ​ 678,579 ​ Tax expense ​ 128,436 ​ 878 ​ ​ 215,112 ​ ​ 54,878 ​ Net income (loss) ​ $ 810,783 ​ $ ( 226,366 ) ​ $ 2,753,523 ​ $ 623,701 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) per common share / unit: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic and Diluted ​ $ 0.06 ​ $ ( 6.62 ) ​ $ 0.23 ​ $ 18.25 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-average number of shares of common stock / units outstanding: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic and Diluted ​ 14,545,241 ​ 34,182 ​ ​ 11,996,969 ​ ​ 34,182 ​ ​ See accompanying notes to the unaudited consolidated financial statements. ​ 4 Table of Contents DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ / MEMBERS’ EQUITY (DEFICIT) (Unaudited) Nine Months Ended September 30, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Members' / ​ ​ ​ ​ ​ ​ ​ Common Stock ​ Accumulated Stockholders’ ​ ​ Common Units ​ Class A ​ Class B ​ ​ ​ ​ equity ​ equity ​ Units Amount Units Amount Units Amount APIC (deficit) (deficit) Balance, December 31, 2021 ​ 34,182 ​ $ 4,294,241 ​ — ​ $ — ​ — ​ $ — ​ $ — ​ $ ( 4,669,097 ) ​ $ ( 374,856 ) Issuance of Class A common stock, net of transaction costs — ​ — 2,800,000 ​ 2,800 — ​ — ​ 10,164,243 ​ — ​ 10,167,043 Conversion of member units to Class B shares ( 28,545 ) ​ ( 200 ) — ​ — 11,378,000 ​ 11,378 ​ ( 11,178 ) ​ — ​ — Conversion of Class B shares to Class A common stock ​ — ​ ​ — ​ 100,000 ​ ​ 100 ​ ( 100,000 ) ​ ​ ( 100 ) ​ ​ — ​ ​ — ​ ​ — Redemption of common units ( 5,637 ) ​ ( 4,294,041 ) — ​ — — ​ — ​ ( 2,905,959 ) ​ — ​ ( 7,200,000 ) Stock-based compensation ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ 85,437 ​ ​ — ​ ​ 85,437 Issuance of restricted stock ​ — ​ ​ — ​ 374,914 ​ ​ 375 ​ — ​ ​ — ​ ​ ( 375 ) ​ ​ — ​ ​ — Restricted stock forfeitures ​ — ​ ​ — ​ ( 14,550 ) ​ ​ ( 15 ) ​ — ​ ​ — ​ ​ 15 ​ ​ — ​ ​ — Distributions to members — ​ — — ​ — — ​ — ​ — ​ ( 916,433 ) ​ ( 916,433 ) Additional paid-in capital related to tax receivable agreement ​ — ​ ​ — ​ — ​ ​ — ​ — ​ ​ — ​ ​ 485,100 ​ ​ — ​ ​ 485,100 Net income — ​ — — ​ — — ​ — ​ ​ — ​ 2,753,523 ​ 2,753,523 Balance, September 30, 2022 — ​ $ — 3,260,364 ​ $ 3,260 11,278,000 ​ $ 11,278 ​ $ 7,817,283 ​ $ ( 2,832,007 ) ​ $ 4,999,814 ​ Three Months Ended September 30, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock ​ ​ ​ ​ ​ ​ ​ Members' / ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ Stockholders’ ​ ​ Common Units ​ Class A ​ Class B ​ ​ ​ ​ equity ​ equity ​ Units ​ Amount Units ​ Amount Units ​ Amount ​ APIC (deficit) ​ (deficit) Balance, June 30, 2022 — ​ $ — 3,163,214 ​ $ 3,163 11,378,000 ​ $ 11,378 ​ $ 7,747,250 ​ $ ( 3,036,348 ) ​ $ 4,725,443 Conversion of Class B shares to Class A common stock ​ — ​ — 100,000 ​ 100 ( 100,000 ) ​ ( 100 ) ​ — ​ — ​ — Stock-based compensation — ​ — — ​ — — ​ — ​ 70,030 ​ — ​ 70,030 Issuance of restricted stock — ​ — 11,700 ​ 12 — ​ — ​ ( 12 ) ​ — ​ — Restricted stock forfeitures ​ — ​ — ( 14,550 ) ​ ( 15 ) — ​ — ​ ​ 15 ​ — ​ — Distributions to members — ​ — — ​ — — ​ — ​ — ​ ( 606,442 ) ​ ( 606,442 ) Net income — ​ — — ​ — — ​ — ​ — ​ 810,783 ​ 810,783 Balance, September 30, 2022 — ​ $ — 3,260,364 ​ $ 3,260 11,278,000 ​ $ 11,278 ​ $ 7,817,283 ​ $ ( 2,832,007 ) ​ $ 4,999,814 ​ See accompanying notes to the unaudited consolidated financial statements. 5 Table of Contents DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ / MEMBERS’ EQUITY (DEFICIT) (Unaudited) Nine Months Ended September 30, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock ​ Accumulated Members' / ​ ​ Common Units ​ Class A ​ Class B ​ ​ ​ ​ equity ​ equity ​ Units Amount Units Amount Units Amount APIC (deficit) (deficit) Balance, December 31, 2020 ​ 34,182 ​ $ 4,294,241 ​ — ​ $ — ​ — ​ $ — ​ $ — ​ $ ( 1,925,951 ) ​ $ 2,368,290 Distributions to members — ​ — — ​ — — ​ — ​ — ​ ( 924,695 ) ​ ( 924,695 ) Net income — ​ — — ​ — — ​ — ​ — ​ 623,701 ​ 623,701 Balance, September 30, 2021 34,182 ​ $ 4,294,241 — ​ $ — — ​ $ — ​ $ — ​ $ ( 2,226,945 ) ​ $ 2,067,296 ​ Three Months Ended September 30, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Members' / ​ ​ ​ ​ ​ ​ ​ Common Units ​ ​ ​ ​ Accumulated ​ Stockholders' ​ ​ Common Stock ​ Class A ​ Class B ​ ​ ​ ​ equity ​ equity ​ Units Amount Units Amount Units Amount APIC (deficit) (deficit) Balance, June 30, 2021 34,182 ​ $ 4,294,241 ​ — ​ $ — ​ — ​ $ — ​ $ — ​ $ ( 1,728,453 ) ​ $ 2,565,788 Distributions to members ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ ( 272,126 ) ​ ( 272,126 ) Net loss ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ ( 226,366 ) ​ ( 226,366 ) Balance, September 30, 2021 ​ 34,182 ​ $ 4,294,241 ​ — ​ $ — ​ — ​ $ — ​ $ — ​ $ ( 2,226,945 ) ​ $ 2,067,296 ​ See accompanying notes to the unaudited consolidated financial statements. ​ 6 Table of Contents ​ DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ For the Nine Months Ended September 30, ​ 2022 2021 Cash Flows Provided By Operating Activities: ​ ​ ​ ​ Net income $ 2,753,523 ​ $ 623,701 Adjustments to reconcile net income to net cash provided by (used in) operating activities: ​ ​ ​ ​ ​ Amortization of deferred financing costs 463,008 ​ 253,887 Amortization of intangible assets 1,465,364 ​ 1,465,364 Amortization of right-of-use assets ​ 94,974 ​ — Stock-based compensation ​ 85,437 ​ — Forgiveness of Paycheck Protection Program loan ( 287,143 ) ​ ​ ( 10,000 ) Paid-in-kind interest ​ ​ — ​ ​ 269,260 Deferred income taxes ​ ​ ( 40,591 ) ​ ​ — Gain from revaluation and settlement of earnout liability — ​ ​ ( 21,232 ) Loss on redemption of non-participating preferred units 590,689 ​ ​ — Bad debt expense ​ 2,717 ​ ​ 67,541 Changes in operating assets and liabilities: ​ ​ ​ ​ ​ ​ Accounts receivable ( 13,520,067 ) ​ ​ 708,025 Prepaid expenses and other assets 482,190 ​ ​ ( 491,560 ) Accounts payable 10,008,327 ​ ​ ( 153,045 ) Accrued liabilities 1,555,037 ​ ​ 118,043 Income taxes payable ​ ​ 94,440 ​ ​ — Deferred revenues ( 201,907 ) ​ ​ 375,621 Operating lease liability ​ ​ ( 75,396 ) ​ ​ — Related party payable ( 70,801 ) ​ ​ ( 964 ) Net cash provided by operating activities 3,399,801 ​ ​ 3,204,641 ​ ​ ​ ​ ​ ​ ​ Cash Flows Used In Financing Activities: ​ ​ ​ ​ Proceeds from note payable ​ ​ 4,260,000 ​ ​ — Payments on term loan ( 412,500 ) ​ ​ ( 1,206,750 ) Payments on lines of credit ​ ​ ( 400,000 ) ​ ​ — Payment of deferred financing costs ( 525,295 ) ​ ​ — Proceeds from Paycheck Protection Program loan — ​ ​ 287,143 Proceeds from Issuance of Class A common stock, net of transaction costs 11,167,043 ​ ​ — Redemption of common units ( 7,200,000 ) ​ ​ — Redemption of non-participating preferred units ​ ​ ( 7,046,251 ) ​ ​ — Payments on seller notes and earnouts payable — ​ ​ ( 369,185 ) Distributions to members ( 916,433 ) ​ ​ ( 924,695 ) Net cash used in financing activities ​ ​ ( 1,073,436 ) ​ ​ ( 2,213,487 ) ​ ​ ​ ​ ​ ​ ​ Net increase in cash and cash equivalents 2,326,365 ​ ​ 991,154 Cash and cash equivalents, beginning of the period ​ 4,684,431 ​ 1,611,998 Cash and cash equivalents, end of the period ​ $ 7,010,796 ​ $ 2,603,152 ​ ​ ​ ​ ​ ​ ​ Supplemental Disclosure of Cash Flow Information: ​ ​ ​ Cash paid for taxes ​ $ 133,401 ​ $ 14,878 Cash paid for interest ​ $ 1,744,365 ​ $ 3,111,628 ​ ​ ​ ​ ​ ​ ​ Non-cash Financing Activities: ​ ​ ​ ​ Transaction costs related to issuances of Class A shares included in accrued liabilities ​ $ 1,000,000 ​ $ — Outside basis difference in partnership ​ $ 3,234,000 ​ $ — Tax receivable agreement payable to Direct Digital Management, LLC ​ $ 278,900 ​ $ — Tax benefit on tax receivable agreement ​ $ 485,100 ​ $ — ​ See accompanying notes to the unaudited consolidated financial statements. ​ 7 Table of Contents DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 — Organization and Description of Business Direct Digital Holdings, Inc. and its subsidiaries, incorporated as a Delaware corporation on August 23, 2021 and headquartered in Houston, Texas, is an end-to-end, full-service programmatic advertising platform primarily focused on providing advertising technology, data-driven campaign optimization and other solutions to underserved and less efficient markets on both the buy- and sell-side of the digital advertising ecosystem. Direct Digital Holdings, Inc. is the holding company for Direct Digital Holdings, LLC (“DDH LLC”), which is, in turn, the holding company for the business formed by DDH LLC’s founders in 2018 through the acquisition of Huddled Masses, LLC (“Huddled Masses TM ” or “Huddled Masses”) and Colossus Media, LLC (“Colossus Media”). Colossus Media operates our proprietary sell-side programmatic platform operating under the trademarked banner of Colossus SSP TM (“Colossus SSP”). In late September 2020, DDH LLC acquired Orange142, LLC (“Orange142”) to further bolster its overall programmatic buy-side advertising platform and to enhance its offerings across multiple industry verticals such as travel, healthcare, education, financial services, consumer products and other sectors with particular emphasis on small and mid-sized businesses transitioning into digital with growing digital media budgets. In February 2022, Direct Digital Holdings, Inc. 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, 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 and, unless otherwise stated, its subsidiaries. All of the subsidiaries are incorporated in the state of Delaware, except for DDH LLC, which was formed under the laws of the State of Texas. The subsidiaries of Direct Digital Holdings, Inc. are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Advertising ​ ​ ​ ​ ​ ​ Solution ​ ​ ​ Date ​ ​ Current % ​ and ​ ​ ​ Of Subsidiary Ownership Segment Date of Formation Acquisition Direct Digital Holdings, LLC 100.0 % N/A ​ June 21, 2018 ​ August 26, 2018 Huddled Masses, LLC 100.0 % Buy-side ​ November 13, 2012 ​ June 21, 2018 Colossus Media, LLC 100.0 % Sell-side ​ September 8, 2017 ​ June 21, 2018 Orange142, LLC 100.0 % Buy-side ​ March 6, 2013 ​ September 30, 2020 ​ Both buy-side subsidiaries, Huddled Masses and Orange142, offer technology-enabled advertising solutions and consulting services to clients through multiple leading demand side platforms (“DSPs”). Colossus SSP is a stand-alone tech-enabled, data-driven platform that helps deliver targeted advertising to diverse and multicultural audiences, including African Americans, Latin Americans, Asian Americans and LGBTQ+ customers, as well as other specific audiences. Providing both the front-end, buy-side operations coupled with our proprietary sell-side operations enables us to curate the first through the last mile in the ad tech ecosystem execution process to drive higher results. Note 2 — Basis of Presentation and Summary of Significant Accounting Policies Basis of presentation The Company’s consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. 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. 8 Table of Contents 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. The adoption dates discussed below reflect this election. Basis of consolidation The consolidated financial statements include the accounts of Direct Digital Holdings, Inc. and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Business combinations The Company analyzes acquisitions to determine if the acquisition should be recorded as an asset acquisition or a business combination. The Company accounts for acquired businesses using the acquisition method of accounting under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations , (“ASC 805”), which requires that assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The fair value of the consideration paid, including any contingent consideration as applicable, is assigned to the underlying net assets of the acquired business based on their respective fair values based on widely accepted valuation techniques in accordance with ASC Topic 820, Fair Value Measurement , as of the closing date. Any excess of the purchase price over the estimated fair values of the net tangible assets and identifiable intangible assets acquired is recorded as goodwill. Significant judgments are used in determining the estimated fair values assigned to the assets acquired and liabilities assumed and in determining estimates of useful lives of long-lived assets. Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future net cash flows, estimates of appropriate discount rates used to calculate the present value of expected future net cash flows, the assessment of each asset’s life cycle, and the impact of competitive trends on each asset’s life cycle and other factors. These judgments can materially impact the estimates used to allocate acquisition date fair values to assets acquired and liabilities assumed, and the resulting timing and amounts charged to, or recognized in, current and future operating results. For these and other reasons, actual results may vary significantly from estimated results. Use of estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates include the allocation of purchase price consideration in the business combination and the related valuation of acquired assets and liabilities, intangible assets, and goodwill impairment testing. The Company bases its estimates on past experiences, market conditions, and other assumptions that the Company believes are reasonable under the circumstances, and the Company evaluates these estimates on an ongoing basis. Cash and cash equivalents Cash and cash equivalents consist of funds deposited with financial institutions and highly liquid instruments with original maturities of three months or less. Such deposits may, at times, exceed federally insured limits. As of September 30, 2022, $ 5,487,110 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. Accounts receivable Accounts receivable primarily consists of billed amounts for products and services rendered to customers under normal trade terms. The Company performs credit evaluations of its customers’ financial condition and generally does not require collateral. 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 establishes an allowance for doubtful accounts as deemed necessary for accounts not covered by this insurance. As of September 30, 2022 and December 31, 2021, the Company’s allowance for doubtful 9 Table of Contents accounts was $ 3,489 and $ 40,856 , respectively. Management periodically reviews outstanding accounts receivable for reasonableness. If warranted, the Company processes a claim with the third-party insurance company to recover uncollected balances, rather than writing the balances off to bad debt expense. 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. For the three months ended September 30, 2022, we recovered $ 22,082 on receivables previously written off. Bad debt expense was $ 35,724 for the three months ended September 30, 2021. Bad debt expense was $ 2,717 and $ 67,541 for the nine months ended September 30, 2022 and 2021, respectively. Concentrations of credit risk The Company has customers on both the buy-and sell-side of its business. The following table sets forth our consolidated concentration of accounts receivable: ​ ​ ​ ​ ​ ​ ​ ​ September 30, December 31, ​ 2022 2021 Customer A 85.0 % 62.9 % Customer B 0.2 % 5.2 % ​ Property and equipment, net Property and equipment are recognized in the consolidated balance sheets at cost less accumulated depreciation and amortization. The Company capitalizes purchases and depreciates its property and equipment using the straight-line method of depreciation over the estimated useful lives of the respective assets, generally ranging from three to five years . Leasehold improvements are amortized over the shorter of their useful lives or the remaining terms of the related leases. As of September 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. Major renewals or improvements that extend the useful lives of the assets are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed, and any resulting gain or loss is recognized in the consolidated statements of operations. Goodwill Under the purchase method of accounting pursuant to ASC 805, goodwill is calculated as the excess of purchase price over the fair value of the net tangible and identifiable intangible assets acquired. In testing goodwill for impairment, we have the option to begin with a qualitative assessment, commonly referred to as “Step 0”, to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry and market considerations, cost factors, entity-specific financial performance and other events, such as changes in our management, strategy and primary user base. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative goodwill impairment analysis is performed, which is referred to as “Step 1”. Depending upon the results of the Step 1 measurement, the recorded goodwill may be written down, and an impairment expense is recorded in the consolidated statements of operations when the carrying amount of the reporting unit exceeds the fair value of the reporting unit. Goodwill is reviewed annually and tested for impairment upon the occurrence of a triggering event. As of September 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 Our intangible assets consist of customer relationships, trademarks and non-compete agreements. Our intangible assets are recorded at fair value at the time of their acquisition and are stated within our consolidated balance sheets net of accumulated amortization. Intangible assets are amortized on a straight-line basis over their estimated useful lives and recorded as amortization expense within general and administrative expenses in our consolidated statements of operations. 10 Table of Contents Impairment of long-lived assets The Company evaluates long-lived assets, including property and equipment, and acquired intangible assets consisting of customer relationships, trademarks and trade names, and non-compete agreements, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is assessed based on the future cash flows expected to result from the use of the asset and its eventual disposition. 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 September 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 The Company follows ASC 820-10, Fair Value Measurement , (“ASC 820-10”), which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and requires certain disclosures about fair value measurements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the most advantageous market for the asset or liability in an orderly transaction. Fair value measurement is based on a hierarchy of observable or unobservable inputs. The standard describes three levels of inputs that may be used to measure fair value. Level 1 — Inputs to the valuation methodology are quoted prices available in active markets for identical securities as of the reporting date; Level 2 — Inputs to the valuation methodology are other significant observable inputs, including quoted prices for similar securities, interest rates, credit risk etc. as of the reporting date, and the fair value can be determined through the use of models or other valuation methodologies; and Level 3 — Inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity of the securities and the reporting entity makes estimates and assumptions relating to the pricing of the securities, including assumptions regarding risk. We segregate all financial assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. Deferred financing costs The Company records costs related to its line of credit and the issuance of debt obligations as deferred financing costs. 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 nine months ended September 30, 2022. On July 26, 2022, the Company repaid the line of credit and terminated the Revolving Credit Facility as of such date and the remaining deferred financing costs of $ 33,434 were amortized to interest expense during the three months ended September 30, 2022. Unamortized deferred financing costs related to the line of credit was $ 0 and $ 96,152 as of September 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 $ 520,682 during the nine months ended September 30, 2022. Unamortized deferred financing costs was $ 2,250,171 and $ 2,091,732 as of September 30, 2022 and December 31, 2021, respectively, and netted against the outstanding debt on the consolidated balance sheets. Right-of-use assets The Company adopted Accounting Standards Update (“ASU”) 2016-02 (“ASU 2016-02”), Leases (Topic 842) as of January 1, 2022, and recognizes operating lease assets and lease liabilities on the balance sheets. The standard requires us to increase our assets and liabilities by equal amounts through the recognition of Right-of-Use (“ROU”) assets and lease liabilities for our operating leases and to recognize the initial and the monthly payments as operating expenses when paid or accrued on our consolidated statements of operations and consolidated statements of cash flows. 11 Table of Contents Revenue recognition The Company adopted FASB ASU 2014-09, Revenue from Contracts with Customers , (“Topic 606”), as of January 1, 2019, for all contracts not completed as of the date of adoption and this has had no impact on the financial position or results of operations using the modified retrospective method. The Company recognizes revenue using the following five steps: ● Identification of a contract(s) with a customer; ● Identification of the performance obligation(s) in the contract; ● Determination of the transaction price; ● Allocation of the transaction price to the performance obligation(s) in the contract; and ● Recognition of revenue when, or as, the performance obligation(s) are satisfied. The Company’s revenues are derived primarily from two sources: buy-side advertising and sell-side advertising. Buy-side advertising The Company purchases media based on the budget established by its customers with a focus on leveraging data services, customer branding, real-time market analysis and micro-location advertising. The Company offers its services on a fully managed and a self-serve basis, which is recognized over time using the output method when the performance obligation is fulfilled. An “impression” is delivered when an advertisement appears on pages viewed by users. The performance obligation is satisfied over time as the volume of impressions are delivered up to the contractual maximum for fully managed revenue and the delivery of media inventory for self-serve revenue. Many customers run several different campaigns throughout the year to capitalize on different seasons, special events and other happenings at their respective regions and localities. The Company provides digital advertising and media buying capabilities with a focus on generating measurable digital and financial life for its customers. Revenue arrangements are evidenced by a fully executed insertion order (“IO”). Generally, IOs specify the number and type of advertising impressions to be delivered over a specified time at an agreed upon price and performance objectives for an ad campaign. Performance objectives are generally a measure of targeting, as defined by the parties in advance, such as number of ads displayed, consumer clicks on ads or consumer actions (which may include qualified leads, registrations, downloads, inquiries or purchases). These payment models are commonly referred to as CPM (cost per impression), CPC (cost per click) and CPA (cost per action). The majority of the Company’s contracts are flat-rate, fee-based contracts. In instances where the Company contracts with third-party advertising agencies on behalf of their advertiser clients, a determination is made to recognize revenue on a gross or net basis based on an assessment of whether the Company is acting as the principal or an agent in the transaction. The Company is acting as the principal in these arrangements and therefore revenue earned and costs incurred are recognized on a gross basis as the Company has control and is responsible for fulfilling the advertisement delivery, establishing the selling prices and delivering the advertisements for fully managed revenue and providing updates and performing all billing and collection activities for the self-serve proprietary platform. 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 prepayments, of $ 1,146,186 and $ 1,348,093 as of September 30, 2022 and December 31, 2021, respectively. Sell-side advertising The Company partners with publishers to sell advertising inventory to the Company’s existing buy-side clients, as well as its own Colossus Media-curated clients and the open markets (collectively referred to as “buyers”) seeking to access the general market as well as unique multi-cultural audiences. 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 12 Table of Contents publishers. The Company generates revenue through the monetization of publisher ad impressions on its platform. The Company’s platform allows publishers to sell, in real time, ad impressions to buyers and provides automated inventory management and monetization tools to publishers across various device types and digital ad formats. The Company recognizes revenue when an ad is delivered in response to a winning bid request from ad buyers. The Company is acting as the principal in these arrangements and therefore revenue earned and costs incurred are recognized on a gross basis, as the Company has control and is responsible for fulfilling the advertisement delivery, establishing the selling prices and delivering the advertisements for fully managed revenue and providing updates and performing all billing and collection activities for its self-serve proprietary platform. The Company maintains agreements with each DSP in the form of written service agreements, which set out the terms of the relationship, including payment terms (typically 30 to 90 days ) and access to its platform. In an effort to reduce the risk of nonpayment, the Company has insurance with a third-party carrier for its accounts receivable as noted above. The following table sets forth our concentration of revenue sources as a percentage of total revenues on a consolidated basis. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ Nine Months Ended ​ ​ ​ ​ September 30, ​ ​ September 30, ​ ​ ​ 2022 2021 ​ 2022 2021 ​ Customer A ​ 69.8 % 23.2 % ​ 60.2 % 16.7 % ​ Customer I 3.9 % 12.2 % ​ 7.7 % 4.1 % ​ Customer E 4.0 % 11.1 % ​ 6.4 % 15.4 % ​ Customer H 3.3 % 7.5 % ​ 2.5 % 4.3 % ​ Customer F — % — % ​ — % 12.7 % ​ ​ Cost of revenues Buy-side advertising Cost of revenues consists primarily of digital media fees, third-party platform access fees, and other third-party fees associated with providing services to our customers. Sell-side advertising The Company pays publishers a fee, which is typically a percentage of the value of the ad impressions monetized through the Company’s platform. Cost of revenues consists primarily of publisher media fees and data center co-location costs. Media fees include the publishing and real-time bidding costs to secure advertising space. Advertising costs The Company expenses advertising costs as incurred. Advertising expense incurred during the three months ended September 30, 2022 and 2021 was $ 295,794 and $ 37,065 , respectively and $ 618,461 and $ 145,609 for the nine months ended September 30, 2022 and 2021, respectively. These costs are included in general and administrative expenses in the consolidated statements of operations. 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. 13 Table of Contents 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 RSUs. 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. Income taxes 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” or the “Continuing LLC Owner”). The TRA provides for certain income (loss) allocations between the Company and DDH LLC under the agreement. DDH LLC is a limited liability company and will continue to be treated as a partnership for federal income tax purposes and, as such, generally will not be subject to any entity-level U.S. 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 (“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. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss under the TRA. 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 of the Code for each taxable year in which a redemption or exchange of LLC interest occurs. During the three months ended September 30, 2022, a member of DDM exchanged 100,000 Class B shares into Class A shares. The Company applies ASC 740-10, Income Taxes (“ASC 740-10”), in establishing standards for accounting for uncertain tax positions. The Company evaluates uncertain tax positions with the presumption of audit detection and applies a “more likely than not” standard to evaluate the recognition of tax benefits or provisions. ASC 740-10 applies a two-step process to determine the amount of tax benefits or provisions to record in the consolidated financial statements. 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 September 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 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 Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker is its Chairman and Chief Executive Officer. The Company views its business as two reportable segments, buy-side advertising, which includes the results of Huddled Masses and Orange142, and sell-side advertising, which includes the results of Colossus Media. Risks and uncertainties Management continues to evaluate the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position and results of its operations, the specific impact is not readily determinable as of the date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Liquidity and capital resources As of September 30, 2022, the Company had cash and cash equivalents of $ 7,010,796 . Based on projections of growth in revenue and operating results in the coming year and the available cash held by us, the Company believes that it will have sufficient cash 14 Table of Contents 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. ​ Note 3 — Intangible Assets Effective September 30, 2020, the Company acquired 100 % of the equity interests of Orange142 for a purchase price of $ 26,207,981 . The acquisition of Orange142 was recorded by allocating the total purchase consideration to the fair value of the net tangible assets acquired, including goodwill and intangible assets, in accordance with ASC 805. The purchase consideration exceeded the fair value of the net assets, resulting in goodwill of $ 4,095,700 and intangible assets of $ 18,033,850 . Intangible assets consist of $ 13,028,320 of 10-year amortizable customer relationships, $ 3,501,200 of 10-year amortizable trademarks and tradenames, and $ 1,504,330 of 5-year amortizable non-compete agreements. The Company records amortization expense on a straight-line basis over the life of the identifiable intangible assets. For the three months ended September 30, 2022 and 2021, amortization expense of $ 488,455 and $ 488,455 , respectively, and for the nine months ended September 30, 2022 and 2021, amortization expense of $ 1,465,364 and $ 1,465,364 , respectively, was recognized, and as of September 30, 2022 and December 31, 2021, intangible assets net of accumulated amortization was $ 14,126,214 and $ 15,591,578 , respectively. As of September 30, 2022, intangible assets and the related accumulated amortization, weighted-average remaining life and future amortization expense are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Trademarks and ​ Non-compete ​ ​ ​ ​ Customer lists tradenames agreements Total Fair value at acquisition date ​ $ 13,028,320 ​ $ 3,501,200 ​ $ 1,504,330 ​ $ 18,033,850 Accumulated amortization ​ ( 2,605,664 ) ​ ( 700,240 ) ​ ( 601,732 ) ​ ( 3,907,636 ) Intangible assets, net ​ $ 10,422,656 ​ $ 2,800,960 ​ $ 902,598 ​ $ 14,126,214 Estimated life (years) ​ 10.0 ​ 10.0 ​ 5.0 ​ Weighted-average remaining life (years) ​ 8.0 ​ 8.0 ​ 3.0 ​ ​ ​ ​ ​ ​ ​ Total 2022 ​ 488,455 2023 ​ 1,953,818 2024 ​ 1,953,818 2025 ​ 1,878,602 2026 ​ 1,652,952 Thereafter ​ 6,198,569 Total ​ $ 14,126,214 ​ The Company expects to deduct goodwill for tax purposes in future years. The factors that make up goodwill include entry into new markets not previously accessible and generation of future growth opportunities. ​ 15 Table of Contents Note 4 — Accrued Liabilities Accrued liabilities consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, December 31, ​ ​ 2022 2021 ​ Accrued compensation and benefits ​ $ 2,892,783 ​ $ 406,510 ​ Accrued litigation fees ​ 493,596 ​ 501,078 ​ Accrued expenses ​ 200,723 ​ 123,118 ​ Accrued interest ​ 12,842 ​ 14,201 ​ Total accrued liabilities ​ $ 3,599,944 ​ $ 1,044,907 ​ ​ 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 over 24 months beginning September 1, 2022. Note 5 — Long-Term Debt Revolving Line of Credit - East West Bank On September 30, 2020, the Company entered into a credit agreement that provided 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 bore interest at the LIBOR rate plus 3.5 % per annum, and at December 31, 2021, the rate was 7.0 % with a 0.50 % unused line fee. In connection with the amendment on December 17, 2021, the Company incurred additional deferred financing fees of $ 4,613 during the nine months ended September 30, 2022. As of September 30, 2022 and December 31, 2021, the Company had outstanding borrowings under the Revolving Credit Facility of $ 0 and $ 400,000 , respectively. On July 26, 2022, the Company repaid the outstanding balance of $ 400,000 plus accrued interest and terminated the Revolving Credit Facility as of such date. During the three months ended September 30, 2022, the Company amortized the remaining deferred financing costs of $ 33,434 . Deferred financing costs were $ 0 and $ 96,152 as of September 30, 2022 and December 31, 2021, respectively, which are classified as an asset on the consolidated balance sheets. The components of interest expense and related fees for the lines of credit are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months For the Nine Months ​ ​ ​ Ended Ended ​ ​ ​ September 30, September 30, ​ ​ 2022 2021 2022 2021 ​ Interest expense – East West Bank ​ $ 3,573 ​ $ 9,965 ​ $ 23,391 ​ $ 28,368 ​ Amortization of deferred financing costs ​ 33,434 ​ 12,944 ​ 100,765 ​ 38,832 ​ Total interest expense and amortization of deferred financing costs ​ $ 37,007 ​ $ 22,909 ​ $ 124,156 ​ $ 67,200 ​ ​ Accrued and unpaid interest as of September 30, 2022 and December 31, 2021 for the Revolving Credit Facility was $ 0 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 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 was to be due on the maturity date. 16 Table of Contents The obligations under the 2020 Term Loan Facility were secured by first-priority liens on all or substantially all assets of DDH LLC and its subsidiaries. The 2020 Term Loan Facility contained a number of financial covenants and customary affirmative covenants. In addition, the 2020 Term Loan Facility included a number of negative covenants, including (subject to certain exceptions) limitations on (among other things): indebtedness, liens, investments, acquisitions, dispositions, and restricted payments. Each of Mark Walker (“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 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 party 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 (“Delayed Draw Loan”). 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. The applicable impact discount under the 2021 Credit Facility is a discount of 0.05 % per annum to the extent that DDH LLC adopts certain services intended to improve overall employee satisfaction and retention plus an additional discount of 0.05 % per annum to the extent that DDH LLC maintains a B Corp certification by Standards Analysts at the non-profit B Lab (or a successor certification or administrator). We expect that interest rates applicable to the 2021 Credit Facility will be modified upon the implementation of a LIBOR replacement rate that will apply to our current and future borrowings. The maturity date of the 2021 Credit Facility is December 3, 2026. 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. 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. 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. 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. In connection with the entry into the 2021 Credit Facility, we paid off in full and terminated the 2020 Term Loan Facility. As of September 30, 2022, the Company owed a balance on the 2021 Credit Facility of $ 25,847,500 . Financing costs incurred in the transaction were initially $ 2,127,185 in 2021 and additional fees of $ 520,682 were incurred during the nine months ended September 30, 2022. Unamortized deferred financing costs as of September 30, 2022 and December 31, 2021 were $ 2,250,171 and $ 2,091,732 , respectively. Accrued and unpaid interest was $ 0 as of September 30, 2022 and December 31, 2021. 17 Table of Contents 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 Nine Months ​ ​ ​ Ended Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2022 2021 ​ 2022 2021 ​ Interest expense – SilverPeak ​ $ — ​ $ 483,796 ​ $ — ​ $ 1,509,752 ​ Interest expense – Layfaette Square ​ 696,818 ​ — ​ 1,673,648 ​ — ​ Amortization of deferred financing costs – Silverpeak ​ — ​ 71,685 ​ — ​ 215,055 ​ Amortization of deferred financing costs – Lafayette Square ​ 128,064 ​ — ​ 362,243 ​ — ​ Total interest expense and amortization of deferred financing costs ​ $ 824,882 ​ $ 555,481 ​ $ 2,035,891 ​ $ 1,724,807 ​ ​ U.S. Small Business Administration Loans Economic Injury Disaster Loan In 2020, the Company applied and was approved for a loan pursuant to the Economic Injury Disaster Loan (“EIDL”), administered by the U.S. Small Business Administration (“SBA”). 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. Installment payments, including principal and interest, of $ 731 will be payable monthly beginning June 15, 2022. Each payment will first be applied to pay accrued interest, then the remaining balance will be used to reduce principal. The loan is secured by substantially all assets of DDH LLC. Accrued and unpaid interest expense as of September 30, 2022 and December 31, 2021 was $ 12,842 and $ 8,647 , respectively, and is included in accrued expenses on the consolidated balance sheets. Paycheck Protection Program In 2020, the Company applied and was approved for a loan pursuant to the Paycheck Protection Program (“PPP”), administered by the SBA (the “PPP-1 Loan”). The PPP was authorized in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and was designed to provide a direct financial incentive for qualifying business to keep their workforce employees. The SBA made PPP loans available to qualifying businesses in amounts up to 2.5 times their average monthly payroll expenses, and loans are forgivable after a “covered period” (eight or twenty-four weeks) as long as the borrower maintains its payroll and utilities. 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. DDH LLC received the PPP-1 Loan proceeds of $ 287,100 on May 8, 2020. On February 16, 2021, the remaining $ 10,000 balance of the PPP-1 Loan was forgiven. 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. On April 11, 2022 , the balance on the PPP-2 Loan was forgiven. As of September 30, 2022, future minimum payments related to long-term debt are as follows for the years ended December 31: ​ ​ ​ ​ 2022 $ 163,750 2023 655,000 2024 1,310,000 2025 1,310,473 2026 1,310,473 Thereafter ​ 21,247,804 Total ​ 25,997,500 Less current portion ​ ( 655,000 ) Less deferred financing costs ​ ( 2,250,171 ) Long-term debt, net ​ $ 23,092,329 ​ ​ 18 Table of Contents ​ Note 6 — Mandatorily Redeemable Preferred Units ASC 480, Distinguishing Liabilities from Equity, (“ASC 480”), defines mandatorily redeemable financial instruments as any financial instruments issued in the form of shares that have an unconditional obligation requiring the issuer to redeem the instrument by transferring its assets at a specified or determinable date (or dates) or upon an event that is certain to occur. A mandatorily redeemable financial instrument shall be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity. 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 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. Class A Preferred Units 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. 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 nine months ended September 30, 2021, the Company recorded interest expense relating to the Class A Preferred Units of $ 261,781 . Class B Preferred Units In connection with the Orange142 acquisition, DDH LLC issued 7,076 non-voting Class B Preferred Units at a purchase price of $ 7,046,251 , and a fair value of $ 6,455,562 . Class B Preferred Units were mandatorily redeemable for $ 7,046,251 on September 30, 2024, with 7 % preferred annual returns paid on a quarterly basis. Due to the mandatory redemption feature, ASC 480 requires that the Class B 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 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. The Company recorded interest expense relating to the Class B Preferred Units of $ 0 and $ 124,323 , for the three months ended September 30, 2022 and 2021, respectively and $ 62,162 and $ 368,915 for the nine months ended September 30, 2022 and 2021, respectively. Note 7 — Related Party Transactions Related Party Transactions 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 the fiscal year ending December 31, 2020. This remaining balance owed was paid to the members as of September 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 is 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 19 Table of Contents 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 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. 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 September 30, 2022 and 2021, total fees paid to Walker, Smith and Woolford were $ 0 , $ 0 and $ 0 , and $ 103,846 , $ 103,846 , and $ 45,000 , respectively. For the nine months ended September 30, 2022 and 2021, total fees paid to Walker, Smith and Woolford were $ 56,250 , $ 56,250 and $ 22,500 and $ 328,846 , $ 328,846 , and $ 135,000 , respectively. Note 8 — Commitments and Contingencies Litigation The Company may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. In management’s opinion, the outcome of any such litigation will not materially affect the Company’s financial condition. Nevertheless, due to uncertainties in the settlement process, it is at least reasonably possible that management’s view of the outcome could change materially in the near term. Huddled Masses was named as a defendant in a lawsuit on July 10, 2019 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 over 24 months beginning September 1, 2022. The liability has been recorded and included in accrued liabilities on the consolidated balance sheets as of September 30, 2022 and December 31, 2021 (See Note 4 – Accrued Liabilities). Office Lease 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 expired July 1, 2022, and had 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 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 also leases office 20 Table of Contents furniture for its corporate headquarters under a lease agreement effective April 2019 and expiring July 2023. The monthly rent expense is approximately $ 1,223 . In March 2021, the Company extended its lease for office space at 716 Congress Ave, Ste 100 in Austin, Texas with an effective date of January 1, 2022. The lease expires December 31, 2023 and has a base rent of approximately $ 6,700 per month. For the three months ended September 30, 2022 and 2021, the Company incurred rent expense of $ 89,452 and $ 52,288 , respectively, for the combined leases. For the nine months ended September 30, 2022 and 2021, the Company incurred rent expense of $ 193,013 and $ 165,731 , respectively, for the combined leases. Supplemental balance sheet information related to operating leases is included in the table below for the year ended September 30, 2022: ​ ​ ​ ​ ​ 2022 Operating lease - right-of-use asset ​ $ 840,505 ​ ​ ​ ​ Operating lease liabilities - current ​ $ 92,473 Operating lease liabilities - long-term ​ 767,610 Total lease liability ​ $ 860,083 ​ The weighted-average remaining lease term for the Company’s operating lease is seven years as of ended September 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: ​ ​ ​ ​ 2022 $ 39,394 2023 ​ 154,490 2024 ​ 110,215 2025 ​ 156,077 2026 ​ 159,755 Thereafter ​ 530,324 Total lease payments ​ 1,150,255 Less imputed interest ​ 290,172 Total lease liability ​ $ 860,083 ​ ​ Note 9 — Stockholders’ / Members’ Equity (Deficit) and Stock-Based Compensation Plans Members’ Equity Prior to the Organizational Transactions, DDH LLC was authorized to issue common units, Class A Preferred Units and Class B Preferred Units. In connection with the acquisition of Orange142, DDH LLC issued 5,637 common units, 3,500 Class A Preferred Units and 7,046 Class B Preferred Units. The common units were valued at $ 4,294,041 and Class A and Class B Preferred Units were valued at a total of $ 9,913,940 . In December 2021, DDH LLC redeemed all of the Class A Preferred Units. As of December 31, 2021, the total number of outstanding common units of DDH LLC was 34,182 units. The common units have voting rights, as well as certain redemption features at the option of the Company. In accordance with ASC 480, as of December 31, 2021, the Company classified the preferred units as a liability in the consolidated balance sheets. 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 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. In August 2022, a Class B common stockholder tendered 100,000 of its limited 21 Table of Contents liability company units to the Company in exchange for newly issued shares of Class A common stock of the Company on a one-for-one basis. In connection with this exchange, an equivalent number of the holder’s shares of Class B common stock were cancelled. As of September 30, 2022, DDM held 11,278,000 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. On February 15, 2022, the Company completed its initial public offering of 2,800,000 units (“Units”), each consisting of (i) one share of our Class A common stock and (ii) one warrant entitling the holder to purchase one share of our Class A Common Stock at an exercise price of $ 5.50 per share. The warrants became immediately exercisable upon issuance and are exercisable for a period of five years after the issuance date. The shares of Class A Common Stock and warrants may be transferred separately immediately upon issuance. At September 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 September 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. The underwriters have not exercised this option as of September 30, 2022. 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 offering expenses recorded in accrued liabilities are approximately $ 1,000,000 as of September 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. 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 a 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, amended the remainder of the principal and interest for the Common Units Redemption Price to be $ 3,998,635 , which was paid in full on July 28, 2022. 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: (1) discount rate of 1.94 % based on the applicable U.S. 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 as of September 30, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Warrants ​ ​ ​ ​ ​ ​ Weighted Average ​ ​ ​ ​ ​ ​ ​ Weighted Average ​ Contractual Life ​ Aggregate ​ Shares Exercise Price (in years) Intrinsic Value Outstanding at January 1, 2022 — ​ $ — — ​ $ — Granted 3,220,000 ​ $ 5.50 4.38 ​ $ — Exercised — ​ $ — — ​ $ — Canceled — ​ $ — — ​ $ — Outstanding at September 30, 2022 3,220,000 ​ $ 5.50 4.38 ​ $ — Exercisable at September 30, 2022 3,220,000 ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 initially granted 264,850 stock options and 363,614 RSUs to employees and non-employee directors. Information on activity for both the stock options and RSUs is detailed below. 22 Table of Contents As of September 30, 2022, the Company recognized $ 85,437 of stock-based compensation expense in the consolidated statement of operations. 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 September 30, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock Options ​ ​ ​ ​ Weighted Average ​ ​ ​ ​ ​ ​ Weighted Average ​ Contractual Life ​ Aggregate ​ ​ Shares ​ Exercise Price ​ (in years) ​ Intrinsic Value Outstanding at December 31, 2021 — ​ $ — ​ $ — Granted 276,150 ​ $ 1.68 ​ ​ $ 280 Exercised — ​ $ — ​ ​ $ — Forfeited ( 14,550 ) ​ $ 1.62 ​ ​ $ 8,399 Outstanding at September 30, 2022 261,600 ​ $ — 9.7 ​ $ 156,178 Exercisable at September 30, 2022 — ​ ​ ​ As of September 30, 2022, all stock options remain unvested with related unamortized stock-based compensation expense totaling $ 238,527 and the weighted-average period over which such stock-based compensation expense will be recognized is 2.71 years. Restricted Stock Units 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 ​ per Share Unvested- December 31, 2021 ​ ​ ​ Granted 374,914 ​ $ 1.66 Exercised — ​ — Forfeited ( 14,550 ) ​ $ 1.62 Canceled — ​ — Unvested- September 30, 2022 360,364 ​ $ 1.66 ​ As of September 30, 2022, unrecognized stock-based compensation of $ 539,812 related to unvested RSUs will be recognized on a straight- line basis over a period of 2.7 years. ​ 23 Table of Contents Note 10 — Income (Loss) Per Share / Unit The Company has two classes of common stock, Class A and Class B. Basic and diluted earnings per share (“EPS”) attributable to common stockholders for Class A and Class B common stock were the same because they were entitled to the same liquidation and dividend rights. The following table sets forth the computation of the Company’s basic and diluted income (loss) per share. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended For the Nine Months Ended ​ ​ ​ September 30, September 30, ​ ​ 2022 2021 2022 2021 ​ Net income (loss) per unit attributable to stockholders/members ​ $ 810,783 ​ $ ( 226,366 ) ​ $ 2,753,523 ​ $ 623,701 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average common shares outstanding - basic ​ 14,545,241 ​ 34,182 ​ 11,996,969 ​ 34,182 ​ Options to purchase common stock ​ — ​ — ​ — ​ — ​ Restricted stock ​ — ​ — ​ — ​ — ​ Weighted average common shares outstanding - diluted ​ 14,545,241 ​ 34,182 ​ 11,996,969 ​ 34,182 ​ Net income (loss) per share / unit, basic and diluted ​ $ 0.06 ​ $ ( 6.62 ) ​ $ 0.23 ​ $ 18.25 ​ ​ ​ Note 11 — Employee Benefit Plans The Company sponsors a safe harbor, defined contribution 401(k) and profit-sharing plan (the “Plan”) that allows eligible employees to contribute a percentage of their compensation. 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 and nine months ended September 30, 2022 and 2021, the Company matching contributions were $ 56,158 and $ 45,400 , respectively and $ 159,219 and $ 122,792 , respectively. Additionally, the Company may make a discretionary profit- sharing contribution to the Plan. During the three and nine months ended September, 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. The Trust is funded with contributions made by the Company and participating employees at amounts sufficient to keep the Trust on an actuarially sound basis. 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 September 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 tax receivable agreement (“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. During the three months ended September 30, 2022, a member of DDM exchanged 100,000 Class B shares into Class A shares. As of September 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 recognized 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 24 Table of Contents 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. 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 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 $ 81,710 and $ 168,386 for the three and nine months ended September 30, 2022, respectively. 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 Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2022 2021 2022 2021 Current ​ $ 46,730 ​ $ — ​ $ 94,440 ​ $ — Deferred ​ 34,980 ​ — ​ 73,946 ​ — Total provision for income taxes ​ $ 81,710 ​ $ — ​ $ 168,386 ​ $ — ​ The Company is also subject to Texas franchise taxes. Including the franchise tax, total provision for income taxes for the three months ended September 30, 2022 and 2021 was $ 128,436 and $ 878 , respectively. For the nine months ended September 30, 2022 and 2021, the total provision for income taxes including franchise tax was $ 215,112 and $ 54,878 , respectively. ​ The components of deferred tax assets are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of ​ As of ​ ​ September 30, ​ December 31, ​ 2022 2021 Outside basis difference in partnership interests in DDH, LLC ​ $ 3,153,150 ​ $ — Other ​ 6,904 ​ Total deferred income taxes ​ $ 3,160,054 ​ $ — ​ The effective tax rate for the three and nine months ended September 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 Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker is its Chairman and Chief Executive Officer. The Company views its business as two reportable segments, buy-side advertising, which includes the results of Huddled Masses and Orange142, and sell-side advertising, which includes the results of Colossus Media. All of the Company’s revenues are attributed to the United States. 25 Table of Contents Revenue by business segment is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months For the Nine Months ​ ​ ​ Ended Ended ​ ​ ​ September 30, September 30, ​ ​ 2022 2021 2022 2021 ​ Buy-side advertising $ 7,130,736 ​ $ 6,033,883 ​ $ 22,283,044 ​ $ 19,975,235 ​ Sell-side advertising ​ 18,854,639 ​ 2,326,862 ​ ​ 36,333,976 ​ 5,261,135 ​ Total revenues ​ $ 25,985,375 ​ $ 8,360,745 ​ $ 58,617,020 ​ $ 25,236,370 ​ ​ Operating income (loss) by business segment reconciled to income before taxes is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months For the Nine Months ​ ​ ​ Ended Ended ​ ​ ​ September 30, September 30, ​ ​ 2022 2021 2022 2021 ​ Buy-side advertising ​ $ 1,357,635 ​ $ 1,096,764 ​ $ 5,620,194 ​ $ 4,705,408 ​ Sell-side advertising ​ 2,365,495 ​ 115,453 ​ 4,599,629 ​ 277,293 ​ Corporate office expenses ​ ( 1,878,306 ) ​ ( 645,305 ) ​ ( 4,725,981 ) ​ ( 1,921,973 ) ​ Total operating income ​ ​ 1,844,824 ​ ​ 566,912 ​ ​ 5,493,842 ​ ​ 3,060,728 ​ Corporate other expense ​ ​ ( 905,605 ) ​ ​ ( 792,400 ) ​ ​ ( 2,525,207 ) ​ ​ ( 2,382,149 ) ​ Income before taxes ​ $ 939,219 ​ $ ( 225,488 ) ​ $ 2,968,635 ​ $ 678,579 ​ ​ Total assets by business segment are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ As of As of ​ ​ ​ September 30, ​ December 31, ​ ​ 2022 2021 ​ Buy-side advertising ​ $ 26,454,069 ​ $ 25,648,105 ​ Sell-side advertising ​ 22,597,857 ​ 8,277,575 ​ Corporate office expenses ​ 4,748,575 ​ 2,074,253 ​ Total assets ​ $ 53,800,501 ​ $ 35,999,933 ​ ​ ​ Note 14 — Subsequent Events On November 9, 2022 the Company entered into a definitive agreement to acquire the software development rights to its proprietary supply-side platform supporting Colossus Media, LLC for a purchase price of $ 500,000 . ​ No other events occurred subsequent to the balance sheet date through the date of this report that would require recognition or disclosure. ​