What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-05-15 compared with 2022-11-14 · 225 added, 289 removed, 492 unchanged (51% of the section changed)

3 unchanged sentences

CONSOLIDATED BALANCE SHEETS

September 30, 2022

March 31, 2023

December 31, 2022

4 unchanged sentences

Total current assets

Property, equipment, and software, net of accumulated depreciation and amortization of $ 90,711 and $ 34,218 , respectively

Intangible assets, net (Note 4)

Deferred tax asset, net (Note 13)

Deferred financing costs, net

Operating lease right-of-use assets

Other long-term assets

LIABILITIES AND STOCKHOLDERS’ / MEMBERS' EQUITY (DEFICIT)

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

CURRENT LIABILITIES:

9 unchanged sentences

Notes payable, net of short-term portion and deferred financing cost of $ 1,994,724 and $ 2,115,161 , respectively

Mandatorily redeemable non-participating preferred units

Line of credit

Paycheck Protection Program loan

Economic Injury Disaster Loan

3 unchanged sentences

COMMITMENTS AND CONTINGENCIES (Note 9)

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

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

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

STOCKHOLDERS’ EQUITY (DEFICIT)

Class A common stock, $ 0.001 par value per share, 160,000,000 shares authorized, 3,491,318 and 3,252,764 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively

Class B common stock, $ 0.001 par value per share, 20,000,000 shares authorized, 11,278,000 shares issued and outstanding as of March 31, 2023 and December 31, 2022

Additional paid-in capital

2 unchanged sentences

( 3,643,261 )

Total stockholders’ / members' equity (deficit)

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

Total stockholders’ equity

Total liabilities and stockholders’ equity

See accompanying notes to the unaudited consolidated financial statements.

3 unchanged sentences

For the Three Months Ended

For the Nine Months Ended

September 30,

Buy-side advertising

9 unchanged sentences

Total operating expenses

Income from operations

(Loss) 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

Contingent loss on early termination of line of credit

Interest expense

( 1,017,301 )

( 2,432,567 )

Total other expense

1 unchanged sentence

( 1,256,494 )

Income before taxes

Net income (loss)

Net income (loss) per common share / unit:

Loss before taxes

( 1,408,582 )

Tax (benefit)

( 1,333,934 )

Net loss per common share:

Basic and diluted

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

Weighted-average number of shares of common stock outstanding:

Basic and diluted

2 unchanged sentences

AND SUBSIDIARIES

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

Nine Months Ended September 30, 2022

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

Three Months Ended March 31, 2023

Stockholders’

1 unchanged sentence

( 3,643,261 )

Issuance of Class A common stock, net of transaction costs

Conversion of member units to Class B shares

Conversion of Class B shares to Class A common stock

Redemption of common units

( 4,294,041 )

( 2,905,959 )

( 7,200,000 )

Stock-based compensation

1 unchanged sentence

Restricted stock forfeitures

Distributions to members

Additional paid-in capital related to tax receivable agreement

Balance, September 30, 2022

Warrants exercised

( 1,333,934 )

Three Months Ended September 30, 2022

Stockholders’

Balance, June 30, 2022

( 1,333,934 )

Conversion of Class B shares to Class A common stock

Stock-based compensation

Issuance of restricted stock

Restricted stock forfeitures

Distributions to members

Balance, September 30, 2022

Balance, March 31, 2023

( 4,977,195 )

See accompanying notes to the unaudited consolidated financial statements.

DIRECT DIGITAL HOLDINGS, INC.

AND SUBSIDIARIES

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

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2022

Stockholders’

Balance, December 31, 2021

( 4,669,097 )

Distributions to members

Balance, September 30, 2021

Issuance of Class A common stock, net of transaction costs

Conversion of member units to Class B shares

Redemption of common units

( 4,294,041 )

Three Months Ended September 30, 2021

Stockholders'

Balance, June 30, 2021

( 2,905,959 )

( 7,200,000 )

Distributions to members

Balance, September 30, 2021

Balance, March 31, 2022

( 5,489,170 )

3 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30,

Cash Flows Provided By Operating Activities:

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

For the Three Months Ended March 31,

Cash Flows Provided By (Used In) Operating Activities:

( 1,333,934 )

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

Amortization of deferred financing costs

1 unchanged sentence

Amortization of right-of-use assets

Amortization of capitalized software

Depreciation of property and equipment

Stock-based compensation

Forgiveness of Paycheck Protection Program loan

Paid-in-kind interest

Deferred income taxes

Gain from revaluation and settlement of earnout liability

Payment on tax receivable agreement

Loss on redemption of non-participating preferred units

Bad debt expense

Contingent loss on early termination of line of credit

Bad debt recovery

Changes in operating assets and liabilities:

Accounts receivable

( 13,520,067 )

Prepaid expenses and other assets

Accounts payable

( 3,908,861 )

Accrued liabilities

3 unchanged sentences

Related party payable

Net cash provided by operating activities

Cash Flows Used In Financing Activities:

Proceeds from note payable

Net cash provided by (used in) operating activities

Cash Flows Used In Investing Activities:

Cash paid for capitalized software and property and equipment

Net cash used in investing activities

Cash Flows (Used In) Provided by Financing Activities:

Payments on term loan

( 1,206,750 )

Payments on lines of credit

Payments of litigation settlement

Payment of deferred financing costs

Proceeds from Paycheck Protection Program loan

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

3 unchanged sentences

( 7,046,251 )

Payments on seller notes and earnouts payable

Proceeds from warrants exercised

Distributions to members

Net cash used in financing activities

( 1,073,436 )

( 2,213,487 )

Net increase in cash and cash equivalents

Net cash (used in) provided by financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of the period

5 unchanged sentences

Transaction costs related to issuances of Class A shares included in accrued liabilities

Outside basis difference in partnership

Tax receivable agreement payable to Direct Digital Management, LLC

Tax benefit on tax receivable agreement

Common unit redemption balance included in accrued liabilities

See accompanying notes to the unaudited consolidated financial statements.

3 unchanged sentences

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., incorporated as a Delaware corporation on August 23, 2021 and headquartered in Houston, Texas, together with its subsidiaries, operates 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.

24 unchanged sentences

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.

3 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.

In the opinion of management, the unaudited interim 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”).

25 unchanged sentences

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.

As of March 31, 2023, $ 5,218,686 of the Company’s cash and cash equivalents exceeded the federally insured limits, none of which is held at Silicon Valley Bank (“SVB”).

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

4 unchanged sentences

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

accounts was $ 3,489 and $ 40,856 , respectively.

As of March 31, 2023 and December 31, 2022, the Company’s allowance for doubtful accounts

was $ 4,203 and $ 4,323 , respectively.

Management periodically reviews outstanding accounts receivable for reasonableness.

2 unchanged sentences

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.

For the three months ended March 31, 2023 and 2022, we recovered $ 120 and $ 2,425 , respectively, on receivables previously written off.

Concentrations of credit risk

1 unchanged sentence

The following table sets forth our consolidated concentration of accounts receivable:

September 30,

Property and equipment, net

2 unchanged sentences

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.

1 unchanged sentence

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.

Internal Use of Software Development Costs (Capitalized Software)

The Company capitalizes costs related to the development of internal-use software.

Costs incurred during the application development phase are capitalized and amortized using the straight-line method over the estimated useful life.

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.

4 unchanged sentences

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.

As of March 31, 2023, 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

7 unchanged sentences

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.

As of March 31, 2023 and December 31, 2022, 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.

The Company follows ASC 820-10, Fair Value Measurement , which defines fair value, establishes a framework for measuring fair value in U.S.

GAAP, and requires certain disclosures about fair value measurements.

10 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 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.

In December 2021, the Company amended its line of credit with East West Bank (see Note 6 – 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 $ 0 as of March 31, 2023 and December 31, 2022 and due to the revolving nature of this debt, was classified as an asset on the consolidated balance sheets.

In January 2023, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (the “SVB Loan Agreement”) and incurred $ 211,934 of deferred financing costs during the three months ended March 31, 2023.

As the Company had not yet drawn any amounts on the agreement, on March 13, 2023 the Company issued a notice of termination and expensed the deferred financing costs which totaled $ 299,770 to contingent loss on early termination of line of credit during the three months ended March 31, 2023.

Termination of the facility with Silicon Valley Bank became effective April 20, 2023.

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 $ 15,567 and $ 180,480 during the three months ended March 31, 2023 and 2022, respectively.

Unamortized deferred financing costs for the note payable was $ 1,994,724 and $ 2,115,161 as of March 31, 2023 and December 31, 2022, 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 Company adopted 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.

24 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 prepayments, of $ 1,146,186 and $ 1,348,093 as of September 30, 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 $ 949,604 and $ 546,710 as of March 31, 2023 and December 31, 2022, 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

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

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

4 unchanged sentences

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,

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

Cost of revenues

7 unchanged sentences

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.

Advertising expense incurred during the three months ended March 31, 2023 and 2022 was $ 463,438 and $ 102,348 .

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

4 unchanged sentences

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.

For additional information regarding stock-based compensation and the assumptions used for determining the fair value of stock options, see Note 10 — Stockholders’ Equity (Deficit) and Stock-Based Compensation Plans.

Income (loss) per share

Basic income (loss) per share is calculated by dividing net income available to common stockholders by the weighted average number of shares 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.

Diluted income per share 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.

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”).

2 unchanged sentences

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.

Any taxable income or loss generated by the Company will be allocated to holders of LLC units (“LLC Units”) in accordance with the Second Amended and Restated Limited Liability Company Agreement (“LLC Agreement”), 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.

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 LLC Agreement.

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 Units 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.

During year ended December 31, 2022, a member of DDM exchanged 100,000 Class B shares into Class A shares.

The Company applies ASC 740-10, Income Taxes , 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.

1 unchanged sentence

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.

As of March 31, 2023 and December 31, 2022, the Company had no uncertain tax positions.

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

6 unchanged sentences

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.

Accounting pronouncements not yet adopted

In June 2016, the FASB issued ASU No.

2016-13 , Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments , as amended, which requires, among other things, the use of a new current expected credit loss (“CECL”) model in order to determine the Company’s allowances for doubtful accounts with respect to accounts receivable.

The CECL model requires that the Company estimate its lifetime expected credit loss with respect to its receivables and contract assets and record allowances that, when deducted from the balance of the receivables, represent the net amounts expected to be collected.

The Company will also be required to disclose information about how it developed the allowances, including changes in the factors that influenced its estimate of expected credit losses and the reasons for those changes.

This ASU is effective for annual periods, including interim periods

within those annual periods, beginning after December 15, 2022.

The Company adopted the new guidance on January 1, 2023 on a modified retrospective basis and determined it did not have a material impact on its consolidated financial statements of financial position, results of operations, cash flows or net loss per share.

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

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 March 31, 2023, the Company had cash and cash equivalents of $ 6,718,559 .

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 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 — Property, Equipment and Software, net

Property, equipment and software, net consists of the following:

Furniture and fixtures

Computer equipment

Leasehold Improvements

Capitalized software

Property, equipment and software, gross

accumulated depreciation and amortization

Total property, equipment and software, net

The Company moved headquarters in 2022 and capitalized furniture and fixtures, computer equipment and leasehold improvements related to the move.

The Company acquired the license to our proprietary Colossus SSP platform in November 2022 from our third-party developer.

Depreciation and amortization expense related to property, equipment, and software was $ 56,493 and $ 0 for the three months ended March 31, 2023 and 2022, respectively.

The following table summarizes depreciation and amortization expense by line item for the three months ended March 31, 2023 and 2022:

For the Three Months

Cost of revenue

General and administrative

Total depreciation and amortization

Note 4 — 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 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:

For the three months ended March 31, 2023 and 2022, amortization expense of $ 488,455 and $ 488,455 , respectively, was recognized, and as of March 31, 2023 and December 31, 2022, intangible assets net of accumulated amortization was $ 13,149,304 and $ 13,637,759 , respectively.

As of March 31, 2023, intangible assets and the related accumulated amortization, weighted-average remaining life and future amortization expense are as follows:

Trademarks and

7 unchanged sentences

Weighted-average remaining life (years)

Total future amortization expense

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

2 unchanged sentences

Accrued liabilities consisted of the following:

September 30,

Accrued compensation and benefits

Accrued litigation fees

Accrued litigation settlement

Accrued expenses

Accrued severance

Accrued interest

5 unchanged sentences

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:

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 , and in connection with the amendment, the Company incurred additional deferred financing fees of $ 4,613 in January 2022.

The loans under the Revolving Credit Facility bore interest at the LIBOR rate plus 3.5 % per annum, and as of March 31, 2022, the rate was 7.0 % with a 0.50 % unused fee.

On July 26, 2022, the Company terminated the Revolving Credit Facility.

As of March 31, 2023 and December 31, 2022, the Company did not have any outstanding borrowings or deferred financing costs under the Revolving Credit Facility.

The components of interest expense and related fees for the Revolving Credit Facility are as follows:

For the Three Months

For the Nine Months

September 30,

Interest expense – East West Bank

1 unchanged sentence

Total interest expense and amortization of deferred financing costs

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.

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.

Silicon Valley Bank Financing

On January 9, 2023, the Company entered into the SVB Loan Agreement, by and among Silicon Valley Bank, as lender, and DDH LLC, the Company, Huddled Masses, Colossus Media and Orange142, as borrowers.

The SVB Loan Agreement provided for a revolving credit facility (the “SVB Revolving Credit Facility”) in the original principal amount of $ 5 million, subject to a borrowing base determined based on eligible accounts, and up to an additional $ 2.5 million incremental revolving facility subject to the lender’s consent, which would increase the aggregate principal amount of the Credit Facility to $ 7.5 million.

Loans under the SVB Revolving Credit Facility were to mature on September 30, 2024 unless the Credit Facility was otherwise terminated pursuant to the terms of the Loan Agreement.

On March 10, 2023, the California Department of Financial Protection and Innovation closed SVB and appointed the Federal Deposit Insurance Corporation as receiver.

As the Company had not yet drawn any amounts under the SVB Revolving Credit Facility, on March 13, 2023, the Company issued a notice of termination of the SVB Loan Agreement.

The termination of the SVB Revolving Credit Facility became effective April 20, 2023.

Prior to issuing the notice of termination, the Company received consent to terminate the SVB Revolving Credit Facility and a waiver of the terms relating to the SVB Revolving Credit Facility under its Term Loan and Security Agreement, dated as of December 3, 2021, with Lafayette Square Loan Servicing, LLC (“Lafayette Square”).

The Company did not hold material cash deposits or securities at Silicon Valley Bank and as of the date of this report, has not experienced any adverse impact to its liquidity or to its current and projected business operations, financial condition or results of operations.

During the three months ended March 31, 2023, the Company incurred $ 211,934 of deferred financing costs.

After the Company issued the notice of termination, total deferred financing costs of $ 299,770 were expensed to contingent loss on early termination of line of credit during the three months ended March 31, 2023.

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.

On December 3, 2021, DDH LLC entered into the Term Loan and Security Agreement (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 (“Delayed Draw Loan”).

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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).

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.

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 March 31, 2022 through and including the fiscal quarter ending December 31, 2023, $ 137,500 , and (ii) commencing March 31, 2024 and continuing on the last day of each fiscal quarter thereafter, $ 275,000 , with a final installment due December 31, 2026 in an amount equal to the remaining entire principal balance thereof.

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.

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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.

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

September 30,

Interest expense – SilverPeak

Interest expense – Layfaette Square

Amortization of deferred financing costs – Silverpeak

As of March 31, 2023, the Company owed a balance on the 2021 Credit Facility of $ 25,520,000 .

Additional deferred financing costs of $ 15,567 and $ 180,480 were incurred during the three months ended March 31, 2023 and 2022, respectively.

Unamortized deferred financing costs as of March 31, 2023 and December 31, 2022 were $ 1,994,724 and $ 2,115,161 respectively.

Accrued and unpaid interest was $ 0 as of March 31, 2023 and December 31, 2022.

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

Interest expense – Lafayette Square

Amortization of deferred financing costs – Lafayette Square

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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.

Installment payments, including principal and interest, of $ 731 began monthly on December 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.

Accrued and unpaid interest expense as of March 31, 2023 and December 31, 2022 was $ 12,713 and $ 13,524 , respectively, and is included in accrued expenses on the consolidated balance sheets.

Paycheck Protection Program

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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.

The SBA made PPP loans

available to qualifying businesses in amounts up to 2.5 times their average monthly payroll expenses, and loans were forgivable after a “covered period” (eight or twenty-four weeks) as long as the borrower maintained its payroll and utilities.

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

Any unforgiven portion was 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 did not apply for forgiveness, then six months after the end of the covered period.

In March 2021, DDH LLC applied for and received a PPP loan (the “PPP-2 Loan”) for a principal amount of $ 287,143 and there were 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:

As of March 31, 2023, future minimum payments related to long-term debt are as follows for the years ended December 31:

Less current portion

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Note 7 — 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.

ASC 480, Distinguishing Liabilities from Equity, 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.

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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

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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.

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.

The Company recorded interest expense relating to the Class B Preferred Units of $ 0 and $ 62,162 , for the three months ended March 31, 2022 and 2021, respectively.

Note 8 — 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 the fiscal year ending December 31, 2020.

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

The Company had a net payable to members that totaled $ 1,448,333 as of March 31, 2023 and December 31, 2022, which is included as a related party payable on the consolidated balance sheets.

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.

In February 2022, the Company completed an initial public offering of its securities, and through the Organizational Transactions, formed an Up-C structure, which is often used by partnership and limited liability companies and allows 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 “pass-through” 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).

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 10 – 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.

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(See Note 13 - Tax Receivable Agreement and Income Taxes).

The aggregate change in the balance of gross unrecognized tax benefits, which includes interest and penalties for 2023 and 2022, is as follows:

Tax Receivable Agreement Liabilities

Net total deferred tax assets

Board Services and Consulting Agreement

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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.

In connection with the Organizational Transactions, the consulting agreements were canceled, and for the three months ended March 30, 2023 and 2022, total fees paid to Walker, Smith and Woolford were $ 0 , $ 0 and $ 0 , and $ 56,250 , $ 56,250 , and $ 22,500 , respectively.

Note 9 — Commitments and Contingencies

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.

In management’s opinion, the outcome of any such currently pending 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.

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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).

The liability has been recorded and included in accrued liabilities on the consolidated balance sheets as of March 31, 2023 and December 31, 2022 (See Note 5 – Accrued Liabilities).

Operating Leases

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.

The lease term expired on 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 .

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

The Company also leases office

furniture for its corporate headquarters under a lease agreement effective April 2019 and expiring July 2023.

The monthly rent expense is approximately $ 1,223 .

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

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:

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

For the three months ended March 31, 2023 and 2022, the Company incurred rent expense of $ 79,761 and $ 52,288 , respectively, for the combined leases.

Supplemental balance sheet information related to operating leases is included in the table below for the year ended March 31, 2023:

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 September 30, 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 March 31, 2023, with a weighted-average discount rate of 8 %.

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

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Total lease liability

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.

Note 10 — Stockholders’ Equity (Deficit) and Stock-Based Compensation

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

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 August 2022, DDM tendered 100,000 of its limited 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.

As of March 31, 2023, 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.

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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 shares of Class A Common Stock and warrants were immediately transferable separately upon issuance.

At March 31, 2023, 2,797,800 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.

As of March 31, 2023, 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 underwriters have not exercised this option as of March 31, 2023.

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.

The offering expenses recorded in accrued liabilities are approximately $ 1,000,000 as of March 31, 2023, and relate to executive performance bonuses which are payable upon a certain level of cash generated by warrant exercises.

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.

that amended 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, 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.

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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 as of September 30, 2022:

The following table summarizes warrant activity as of March 31, 2023:

Weighted Average

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Outstanding at January 1, 2023

Outstanding at September 30, 2022

Exercisable at September 30, 2022

Outstanding at March 31, 2023

Exercisable at March 31, 2023

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.

The Company’s board of directors reserved 1,500,000 shares of Class A common stock for issuance in equity awards under the 2022 Omnibus Plan.

Information on activity for both the stock options and RSUs is detailed below.

As of September 30, 2022, the Company recognized $ 85,437 of stock-based compensation expense in the consolidated statement of operations.

During the three months ended March 31, 2023, the Company recognized $ 94,538 of total stock-based compensation expense in the consolidated statement of operations with compensation, tax and benefits.

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:

The following table summarizes the stock option activity under the 2022 Omnibus Plan as of March 31, 2023:

Stock Options

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Outstanding at December 31, 2022

Outstanding at September 30, 2022

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.

Outstanding at March 31, 2023

Exercisable at March 31, 2023

As of March 31, 2023, all stock options remain unvested with related unamortized stock-based compensation expense totaling $ 510,375 and the weighted-average period over which such stock-based compensation expense will be recognized is 2.69 years.

Restricted Stock Units

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Unvested- December 31, 2022

Unvested- September 30, 2022

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.

Note 10 — Income (Loss) Per Share / Unit

Unvested- March 31, 2023

As of March 31, 2023, unrecognized stock-based compensation of $ 1,342,261 related to unvested RSUs will be recognized on a straight- line basis over a period of 2.7 years.

Note 11 — Loss Per Share

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.

The following table sets forth the computation of the Company’s basic and diluted loss per share.

For the Three Months Ended

For the Nine Months Ended

September 30,

Net income (loss) per unit attributable to stockholders/members

( 1,333,934 )

Weighted average common shares outstanding - basic

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Weighted average common shares outstanding - diluted

Net income (loss) per share / unit, basic and diluted

Net loss per common share, basic and diluted

The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net income per share attributable to common stockholders for the periods presented because including them would have been anti-dilutive:

Warrants to purchase common stock

Options to purchase common stock

Total excludable from net loss per share attributable to common stockholders - diluted

Note 12 — Employee Benefit Plans

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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.

For the three ended March 31, 2023 and 2022, the Company’s matching contributions were $ 64,871 and $ 50,561 , 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.

During the three months ended March 31, 2023 and 2022, 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 for the employees of Orange 142.

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.

As of March 31, 2023 and December 31, 2022, the Company analyzed the incurred but not reported claims and recorded an estimated liability, as required.

Note 13 — 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.

In connection with our initial public offering in February 2022, the Company entered into a tax receivable agreement (“TRA”) with DDH LLC and DDM (together, the “TRA Holders”) which provides for payment by the Company to the TRA Holders of 85 % of the net cash savings, if any, in U.S.

federal, state and local income tax and franchise tax that the Company actually realizes or is deemed to realize in certain circumstances.

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.

will retain the benefit of the remaining 15 % of these net cash savings, and as a result, the Company recorded $ 823,481 during 2022 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.

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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

having a continued ownership interest in either DDH LLC or Direct Digital Holdings, Inc.

During the year ended December 31, 2022, a member of DDM exchanged 100,000 Class B shares into Class A shares.

As of March 31, 2023, the Company has recorded a deferred tax asset primarily from the outside basis difference in the partnership interest of $ 5,240,074 , and a total TRA liability of $ 4,286,375 , of which $ 41,141 is reflected as a current liability in which $ 45,815 was paid during the three months ended March 31, 2023.

The payments under the TRA will not be conditional on holder of rights under the TRA having a continued ownership interest in either DDH LLC or the Company.

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.

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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:

Under the Up-C structure, the Company is subject to corporation income tax on the variable ownership changes of 19.7 % and 20.45 % that occurred in the first and third quarters of 2022, respectively.

As a result, the Company recorded a tax provision benefit for federal and state income tax of $ 74,648 and $ 0 for the three months ended March 31, 2023 and 2022, respectively.

The benefit for income taxes is based on the estimated annual effective rate for the year, which includes estimated federal and state income taxes on the Company’s projected pre-tax income.

The (benefit)/expense for income taxes and the effective income tax rates were as follows:

For the Three Months Ended

For the Nine Months Ended

September 30,

Total provision for income taxes

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:

September 30,

Outside basis difference in partnership interests in DDH, LLC

Total deferred income taxes

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.

Benefit for income taxes

Effective income tax rate

The effective tax rates were lower than the statutory tax rates for the three months ended March 31, 2023 primarily due to the Company partnership income that is not subject to federal and state taxes.

The change in tax expense of $ 74,648 when compared to the prior year is primarily attributed to losses reported in the current quarter for which benefit of those losses are expected when compared to losses from the prior year in which those benefits were uncertain.

The Company files for income tax returns in the United States federal jurisdiction and various state jurisdictions.

In the normal course of business, the Company can be examined by various tax authorities, including the Internal Revenue Service in the United States.

There are currently no federal or state audits in process.

Note 14 — Segment Information

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Revenue by business segment is as follows:

For the Three Months

For the Nine Months

September 30,

Buy-side advertising

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Total revenues

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

For the Three Months

For the Nine Months

September 30,

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

Buy-side advertising

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( 1,140,381 )

( 1,921,973 )

Total operating income

Total operating income (loss)

Corporate other expense

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( 1,256,494 )

Income before taxes

Loss before taxes

( 1,408,582 )

Total assets by business segment are as follows:

September 30,

Buy-side advertising

Sell-side advertising

Corporate office expenses

Corporate office

Note 15 — 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.

The Company has evaluated events and transactions occurring subsequent to March 31, 2023, through the date of this report and determined there were no events or transactions that would require recognition or disclosure.

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