What changed in this filing

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Item 1. Financial Statements

2023-11-09 compared with 2023-08-11 · 271 added, 205 removed, 577 unchanged (45% of the section changed)

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CONSOLIDATED BALANCE SHEETS

June 30, 2023

September 30, 2023

December 31, 2022

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For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Buy-side advertising

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( 2,525,207 )

Income (loss) before taxes

Tax expense (benefit)

Net income (loss)

Net income (loss) per common share:

Income before taxes

Net income per common share:

Weighted-average number of shares of common stock outstanding:

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2023

Nine Months Ended September 30, 2023

Stockholders’

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Stock-based compensation

Issuance of restricted stock net of shares withheld for vested awards

Restricted stock forfeitures

Issuance related to vesting of restricted stock units, net of tax withholdings

Warrants exercised

Stock options exercised

Distributions to members

Balance, June 30, 2023

( 1,968,094 )

Three Months Ended June 30, 2023

( 1,968,094 )

Balance, September 30, 2023

( 2,399,479 )

Three Months Ended September 30, 2023

Stockholders’

Balance, March 31, 2023

Balance, June 30, 2023

( 4,534,925 )

Stock-based compensation

Issuance of restricted stock net of shares withheld for vested awards

Restricted stock forfeitures

Issuance related to vesting of restricted stock units, net of tax withholdings

Stock options exercised

Distributions to members

Balance, June 30, 2023

( 1,215,408 )

Six Months Ended June 30, 2022

( 1,215,408 )

Balance, September 30, 2023

( 2,399,479 )

Nine Months Ended September 30, 2022

Stockholders'

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Conversion of member units to Class B shares

Conversion of Class B shares to Class A common stock

Redemption of common units

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Stock-based compensation

Issuance of restricted stock

Distributions to members

Additional paid-in capital related to tax receivable agreement

Balance, June 30, 2022

Balance, September 30, 2022

( 2,832,007 )

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

Stockholders'

Balance, March 31, 2022

Balance, June 30, 2022

( 3,036,348 )

Transaction costs associated with IPO

Conversion of Class B shares to Class A common stock

Stock-based compensation

Issuance of restricted stock

Distributions to members

Additional paid-in capital related to tax receivable agreement

Balance, June 30, 2022

Balance, September 30, 2022

( 2,832,007 )

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CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Cash Flows Provided By Operating Activities:

Net income (loss)

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

Adjustments to reconcile net income to net cash provided by operating activities:

Amortization of deferred financing costs

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Net cash used in investing activities

Cash Flows Provided by (Used In) Financing Activities:

Cash Flows Used In Financing Activities:

Proceeds from note payable

Payments on term loan

Payments of litigation settlement

Payments on lines of credit

Payment of deferred financing costs

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( 7,046,251 )

Proceeds from options exercised

Proceeds from warrants exercised

Distributions to members

Net cash provided by (used in) financing activities

( 1,988,333 )

Net cash used in financing activities

( 3,102,949 )

( 1,073,436 )

Net increase in cash and cash equivalents

6 unchanged sentences

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

Common unit redemption balance included in accrued liabilities

Outside basis difference in partnership

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Tax benefit on tax receivable agreement

Issuance related to vesting of restricted stock units, net of tax withholdings

See accompanying notes to the unaudited consolidated financial statements.

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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”).

Colossus Media operates the Company’s 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.

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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 LGBTQIA+ 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.

Providing both the front-end, buy-side operations coupled with the Company’s proprietary sell-side operations enables the Company 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

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

As of June 30, 2023, $ 5,668,479 of the Company’s cash and cash equivalents exceeded the federally insured limits, none of which is held at Silicon Valley Bank (“SVB”).

As of September 30, 2023, $ 4,555,527 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.

Accounts receivable

Accounts receivable, net

Accounts receivable primarily consists of billed amounts for products and services rendered to customers under normal trade terms.

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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 June 30, 2023 and December 31, 2022, the Company’s allowance for doubtful accounts

was $ 25,754 and $ 4,323 , respectively.

The Company insures a significant portion of 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, 2023 and December 31, 2022, the Company’s allowance for

doubtful accounts was $ 46,433 and $ 4,323 , respectively.

Management periodically reviews outstanding accounts receivable for reasonableness.

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

Bad debt expense was $ 51,652 and $ 27,224 for the three months ended June 30, 2023 and 2022, respectively, and $ 51,532 and $ 24,799 for the six months ended June 30, 2023 and 2022, respectively.

Bad debt expense was $ 46,208 for the three months ended September 30, 2023 and for the three months ended September 30, 2022, the Company recovered $ 22,082 on receivables previously written off.

Bad debt expense was $ 97,740 and $ 2,717 for the nine months ended September 30, 2023 and 2022, respectively.

Concentration of customers

There is an inherent concentration of credit risk associated with accounts receivable arising from revenue from major customers on both the buy-side and sell-side of the business.

For the three months ended June 30, 2023 and 2022, one customer represented 63 % and 56 % of revenues, respectively, and a second customer represented 10 % and 0 % of revenues, respectively.

For the six months ended June 30, 2023 and 2022, one customer represented 62 % and 53 % of revenues, respectively, and a second customer represented 1 % and 11 % of revenues, respectively.

As of June 30, 2023 and December 31, 2023, one customer accounted for 75 % and 80 %, respectively, of accounts receivable.

For the three months ended September 30, 2023 and 2022, one customer represented 82 % and 70 % of revenues, respectively.

For the nine months ended September 30, 2023 and 2022, one customer represented 72 % and 60 % of revenues.

As of September 30, 2023 and December 31, 2022, one customer accounted for 90 % and 80 %, respectively, of accounts receivable.

Property and equipment, net

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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.

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

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.

In testing goodwill for impairment, the Company has 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.

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”.

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

As of June 30, 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.

As of September 30, 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

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.

Intangible assets consist of customer relationships, trademarks and non-compete agreements.

Intangible assets are recorded at fair value at the time of their acquisition and are stated within the consolidated balance sheets net of accumulated amortization.

Impairment of long-lived assets

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

As of June 30, 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.

As of September 30, 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

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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.

The Company segregates 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

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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 6 – Long-Term Debt) and incurred additional deferred financing costs of $ 4,613 during the six months ended June 30, 2022.

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 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 year ended December 31, 2022.

There were no unamortized deferred financing costs related to the line of credit as of June 30, 2023 and December 31, 2022.

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 six months ended June 30, 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 six months ended June 30, 2023.

On July 7, 2023, the Company entered into a new revolving credit facility with East West Bank and incurred deferred financing costs of $ 214,680 during the three months ended September 30, 2023.

Unamortized deferred financing costs related to the new line of credit were $ 187,845 and $ 0 as of September 30, 2023 and December 31, 2022, respectively.

As of September 30, 2023, $ 80,505 of these unamortized deferred financing costs were included in prepaid expenses and other current assets with the balance in other long-term assets.

Termination of the facility with Silicon Valley Bank (“SVB”) 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 six months ended June 30, 2023 and 2022, respectively.

Unamortized deferred financing costs for the note payable was $ 1,858,720 and $ 2,115,161 as of June 30, 2023 and December 31, 2022, respectively, and netted against the outstanding debt on the consolidated balance sheets.

In December 2021, the Company entered into an agreement with Lafayette Square Loan Servicing, LLC (“Lafayette Square”) (see Note 6 – Long-Term Debt) and incurred additional deferred financing costs of $ 15,567 and $ 520,682 during the nine months ended September 30, 2023 and 2022, respectively.

Unamortized deferred financing costs for the note payable was $ 1,722,716 and $ 2,115,161

as of September 30, 2023 and December 31, 2022, respectively, and netted against the outstanding debt on the consolidated balance sheets.

Right-of-use assets

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.

The standard requires the Company to increase assets and liabilities by equal amounts through the recognition of Right-of-Use (“ROU”) assets and lease liabilities for the operating leases and to recognize the initial and the monthly payments as operating expenses when paid or accrued on the consolidated statements of operations and consolidated statements of cash flows.

Revenue recognition

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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.

The Company offers its services on a fully managed 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.

The performance obligation is satisfied over time as the volume of impressions are delivered up to the contractual maximum for fully managed 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”).

Revenue arrangements are evidenced by a fully executed insertion order (“IO”) and/or a master service agreement (“MSA”) covering a combination of marketing tactics.

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.

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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.

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 of the digital ad units and is responsible for fulfilling the advertisement delivery, establishing the minimum selling prices, delivering the advertisements, providing updates and performing all billing and collection activities for the applicable 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 prepayment, of $ 950,831 and $ 546,710 as of June 30, 2023 and December 31, 2022, 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 $ 1,044,069 and $ 546,710 as of September 30, 2023 and December 31, 2022, 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 partners with publishers to sell advertising inventory to the Company’s 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 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 generates revenue

through the monetization of publisher ad impressions on its platform.

The Company’s platform allows the Company to sell, in real time, ad impressions from publishers 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 or displayed 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 of the digital ad units and is responsible for fulfilling the advertisement delivery, establishing the minimum selling prices, delivering the advertisements, providing updates and performing all billing and collection activities for its proprietary platform.

The Company maintains agreements with its customers 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.

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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.

Cost of revenues consists primarily of digital media fees, third-party platform access fees, and other third-party fees associated with providing services to the Company’s customers.

Sell-side advertising

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The Company expenses advertising costs as incurred.

Advertising expense incurred during the three months ended June 30, 2023 and 2022 was $ 533,825 and $ 220,236 , respectively and $ 1,002,263 and $ 322,667 for the six months ended June 30, 2023 and 2022, respectively.

Advertising expense incurred during the three months ended September 30, 2023 and 2022 was $ 471,987 and $ 295,794 , respectively and $ 1,474,250 and $ 618,461 for the nine months ended September 30, 2023 and 2022, respectively.

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

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

Income (loss) per share

Basic income (loss) per share is calculated by dividing net income (loss) 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.

Income per share

Basic income 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 the Company’s 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 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”).

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

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

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

The Company made an election under Section 754 of the Code for each taxable year in which a redemption or exchange of LLC interest occurred.

During the 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.

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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 June 30, 2023 and December 31, 2022, the Company had no uncertain tax positions.

As of September 30, 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.

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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.

Recent Accounting Pronouncements

Accounting pronouncements recently adopted

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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.

The Company is required to disclose information about how it developed the allowances, including changes in the factors that influence 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.

Accounting pronouncements not yet adopted

There are no accounting pronouncements that the Company has not yet adopted that it believes are applicable or would have a material impact on the consolidated financial statements of the Company.

Liquidity and capital resources

As of June 30, 2023, the Company had cash and cash equivalents of $ 5,668,479 .

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 September 30, 2023, the Company had cash and cash equivalents of $ 5,481,949 .

Based on projections of growth in revenue and operating results in the coming year, the available cash held by the Company and the amounts the Company may borrow under the Credit Agreement (as defined below) executed in July 2023, 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:

September 30,

Furniture and fixtures

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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 its third-party developer.

Depreciation and amortization expense related to property, equipment and software was $ 64,987 and $ 0 for the three months ended June 30, 2023 and 2022, respectively, and $ 121,480 and $ 0 for the six months ended June 30, 2023 and 2022, respectively.

The following table summarizes depreciation and amortization expense by line item for the three and six months ended June 30, 2023 and 2022:

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

The following table summarizes depreciation and amortization expense related to property, equipment and software by line item for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended

For the Six Months

Nine Months Ended

September 30,

Cost of revenue

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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 June 30, 2023 and 2022, amortization expense of $ 488,455 and $ 488,455 , respectively, and for the six months ended June 30, 2023 and 2022, amortization expense of $ 976,909 and $ 976,909 , respectively, was recognized, and as of June 30, 2023 and December 31, 2022, intangible assets net of accumulated amortization was $ 12,660,850 and $ 13,637,759 , respectively.

As of June 30, 2023, intangible assets and the related accumulated amortization, weighted-average remaining life and future amortization expense are as follows:

For the three months ended September 30, 2023 and 2022, amortization expense of $ 488,455 and $ 488,455 , respectively, and for the nine months ended September 30, 2023 and 2022, amortization expense of $ 1,465,363 and $ 1,465,364 , respectively, was recognized.

As of September 30, 2023 and December 31, 2022, intangible assets net of accumulated amortization was $ 12,172,396 and $ 13,637,759 , respectively.

As of September 30, 2023, intangible assets and the related accumulated amortization, weighted-average remaining life and future amortization expense are as follows:

Trademarks and

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( 1,050,360 )

( 5,861,454 )

Intangible assets, net

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Accrued liabilities consisted of the following:

September 30,

Accrued compensation and benefits

Accrued litigation settlement

Accrued expenses

Accrued severance

Accrued litigation settlement

Accrued interest

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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.

As of June 30, 2023, the Company owed a balance on the 2021 Credit Facility of $ 25,356,250 .

Additional deferred financing costs of $ 15,567 and $ 180,480 were incurred during the six months ended June 30, 2023 and 2022, respectively.

Unamortized deferred financing costs as of June 30, 2023 and December 31, 2022 were $ 1,858,720 and $ 2,115,161 respectively.

Accrued and unpaid interest was $ 0 as of June 30, 2023 and December 31, 2022.

As of September 30, 2023, the Company owed a balance on the 2021 Credit Facility of $ 25,192,500 .

Additional deferred financing costs of $ 15,567 and $ 520,682 were incurred during the nine months ended September 30, 2023 and 2022, respectively.

Unamortized deferred financing costs as of September 30, 2023 and December 31, 2022 were $ 1,722,716 and $ 2,115,161 respectively.

Accrued and unpaid interest was $ 0 as of September 30, 2023 and December 31, 2022.

The 2021 Credit Facility contains affirmative and negative covenants that, among other things, require the Company to maintain a net leverage ratio of no more than 3.50 to 1.00 as of the last day of each fiscal quarter through December 31, 2023, as adjusted thereafter, and a fixed charge coverage ratio of not less than 1.50 to 1.00 as of the last day of each fiscal quarter, as well as restrictions on the ability to incur indebtedness, create certain liens, make certain investments, make certain dividends and other types of distributions, and enter into or undertake certain mergers, consolidations, acquisitions and sales of certain assets and subsidiaries.

The Company was in compliance with all the financial covenants under the 2021 Credit Facility as of June 30, 2023.

The Company was in compliance with all the financial covenants under the 2021 Credit Facility as of September 30, 2023.

On October 3, 2023, the Company entered into the Fourth Amendment to the 2021 Credit Facility and received proceeds of $ 3.6 million borrowed under the Delayed Draw Term Loan to make payments in connection with the consummation of the 2023 warrant tender offer and fees and expenses incurred as described in Note 16 – Subsequent Events.

In connection with this Fourth Amendment, the Company agreed it would not be permitted to request any additional funds under the Delayed Draw Term Loan, and Lafayette Square would not be obligated to fund any such requests.

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

For the Three Months

For the Six Months

Nine Months Ended

September 30,

Interest expense – Lafayette Square

2 unchanged sentences

2023 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 (“EWB”) in the amount of $ 4,500,000 with an initial availability of $ 1,000,000 (the “2020 Revolving Credit Facility”).

On July 7, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”), by and among East West Bank (“EWB”), as lender, and DDH LLC, the Company, Huddled Masses, Colossus Media, and Orange142, as borrowers.

The Credit Agreement provides for a revolving credit facility (the “2023 Credit Facility”) in the original principal amount of up to $ 5 million, subject to a borrowing base determined based on eligible accounts, and an up to $ 5 million uncommitted incremental revolving facility.

Loans under the 2023 Credit Facility mature on July 7, 2025 (the “Maturity Date”), unless the 2023 Credit Facility is otherwise terminated pursuant to the terms of the Credit Agreement.

Borrowings under the 2023 Credit Facility bear interest at a rate per annum equal to the one-month Term Secured Overnight Financing Rate, as administered by the CME Group Benchmark Administration Limited (“CBA”) (or a successor administrator of the secured overnight financing rate) and displayed by Bloomberg LP (or any successor thereto, or replacement thereof, as approved by EWB) and as determined by EWB on the first day of the applicable interest period, plus 0.10 % (10 basis points), plus 3.00 % per annum (the “Loan Rate”);

provided, that, in no event shall the Loan Rate be less than 0.50 % of the Loan Rate effective as of the date of the Credit Agreement nor more than the maximum rate of interest allowed under applicable law.

Upon an event of default under the Credit Agreement, the outstanding principal amounts of any advances will accrue interest at a rate per annum equal to the Loan Rate plus five percent ( 5 %), but in no event in excess of the maximum rate of interest allowed under applicable law.

At the Company’s option, the Company may at any time prepay the outstanding principal balance of the 2023 Credit Facility in whole or in part, without fee, penalty or premium.

All accrued but unpaid interest on outstanding advances under the Credit Agreement are payable in monthly installments on the last day of each monthly interest period until the Maturity Date when the then outstanding principal balance of the advances and all accrued but unpaid interest thereon becomes due and payable.

The obligations under the 2023 Credit Facility are secured by all or substantially all of the borrowers’ assets.

The Company and the other borrowers are required to maintain compliance at all times with the following financial covenants on a consolidated basis:

(i) a fixed charge coverage ratio of not less than 1.25 to 1.0, beginning with the fiscal quarter ended on June 30, 2023 and at the end of each fiscal quarter thereafter;

(ii) a total funded debt-to-EBITDA ratio of 3.50 to 1.00 as of the last day of each fiscal quarter from June 30, 2023 through December 31, 2023, 3.25 to 1.00 as of the last day of each fiscal quarter from March 31, 2024 through March 31, 2025 and 3.00 to 1.00 as of the last day of each fiscal quarter from June 30, 2025 and thereafter;

and (iii) a liquidity covenant requiring the Company and the other borrowers to maintain minimum liquid assets at all times (calculated using unencumbered cash and cash equivalents and marketable securities), in one or more accounts held with EWB plus Revolving Credit Availability in the amount of $ 1,000,000 .

Revolving Credit Availability is defined as an amount such that the ratio of the value of eligible accounts to the aggregate amount of all outstanding advances under the credit agreement at such time is not less than 2.0 to 1.0.

The Company was in compliance with all the financial covenants under the 2023 Credit Facility as of September 30, 2023.

The Credit Agreement contains customary representations and warranties and includes affirmative and negative covenants applicable to the borrowers and their respective subsidiaries.

The affirmative covenants include, among others, covenants requiring the Company to maintain its legal existence and governmental compliance, deliver certain financial reports and maintain insurance coverage.

The negative covenants include, among others, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions.

The Credit Agreement also includes customary events of default, including, among other things, non-payment defaults, covenant defaults, inaccuracy of representations and warranties, defaults under any of the loan documents, certain cross-defaults to other indebtedness, certain bankruptcy and insolvency events, invalidity of guarantees or grant of security interest, certain ERISA-related transactions and events, certain orders of forfeiture, change of control, certain undischarged attachments, sequestrations, or similar proceedings, and certain undischarged or non-stayed judgments, in certain cases subject to certain thresholds and grace periods.

The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement of the Company or other borrowers.

During the nine months ended September 30, 2023, the Company incurred $ 214,680 of deferred financing costs associated with the 2023 Credit Facility.

2020 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 EWB in the amount of $ 4,500,000 with an initial availability of $ 1,000,000 (the “2020 Revolving Credit Facility”).

On December 17, 2021, the Company amended the 2020 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.

1 unchanged sentence

On July 26, 2022, the Company terminated the 2020 Revolving Credit Facility.

As of June 30, 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 2020 Revolving Credit Facility are as follows:

As of September 30, 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 2023 Revolving Credit Facility and 2020 Revolving Credit Facility are as follows:

For the Three Months

For the Six Months

Interest expense – East West Bank

Amortization of deferred financing costs

Nine Months Ended

September 30,

Interest expense – 2020 Revolving Credit Facility

Amortization of deferred financing costs – 2023 Revolving Credit Facility

Amortization of deferred financing costs – 2020 Revolving Credit Facility

Total interest expense and amortization of deferred financing costs

On July 7, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”) with EWB which provides for a new revolving credit facility as described in Note 15 – Subsequent Events.

Silicon Valley Bank (“SVB”) Financing

7 unchanged sentences

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 six months ended June 30, 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 six months ended June 30, 2023.

During the nine months ended September 30, 2023, the Company incurred $ 211,934 of deferred financing costs.

Small Business Administration Loans

7 unchanged sentences

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

Accrued and unpaid interest expense as of June 30, 2023 and December 31, 2022 was $ 11,918 and $ 13,524 , respectively, and is included in accrued expenses on the consolidated balance sheets.

Accrued and unpaid interest expense as of September 30, 2023 and December 31, 2022 was $ 11,138 and $ 13,524 , respectively, and is included in accrued expenses on the consolidated balance sheets.

Paycheck Protection Program

3 unchanged sentences

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.

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 June 30, 2023, future minimum payments related to long-term debt are as follows for the years ended December 31:

As of September 30, 2023, future minimum payments related to long-term debt are as follows for the years ended December 31:

Less current portion

( 1,146,250 )

Less deferred financing costs

6 unchanged sentences

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 $ 0 , for the three months ended June 30, 2023 and 2022, respectively, and $ 0 and $ 62,162 for the six months ended June 30, 2023 and 2022, respectively.

The Company recorded interest expense relating to the Class B Preferred Units of $ 0 and $ 0 , for the three months ended September 30, 2023 and 2022, respectively, and $ 0 and $ 62,162 for the nine months ended September 30, 2023 and 2022, respectively.

Note 8 — Related Party Transactions

1 unchanged sentence

Member Payable

As of June 30, 2023 and December 31, 2022, the Company had a net payable to members that totaled $ 1,197,175 and $ 1,448,333 , respectively, which is included as a related party payable on the consolidated balance sheets.

As of September 30, 2023 and December 31, 2022, the Company had a net payable to members that totaled $ 1,428,093 and $ 1,448,333 , respectively, which is included as a related party payable on the consolidated balance sheets.

Up-C Structure

1 unchanged sentence

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 10 – Stockholders’ Equity 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.

The Continuing LLC owner holds economic nonvoting LLC Units in DDH LLC and also holds noneconomic voting equity interests in the form of the Class B common stock in Direct Digital Holdings (See Note 10 – Stockholders’ Equity 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 the Company’s Class A common stock on a one -for-one basis.

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

If the Company ever generates sufficient taxable income to utilize the tax benefits, Digital Direct Holdings expects to benefit from the Up-C structure because, in general, the Company expects 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 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:

September 30,

Liability related to tax receivable agreement

8 unchanged sentences

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 June 30, 2023 and 2022 and the six months ended June 30, 2023, no fees were paid to Walker, Smith and Woolford.

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

In connection with the Organizational Transactions, the consulting agreements were canceled, and, for the three months ended September 30, 2023 and 2022 and the nine months ended September 30, 2023, no fees were paid to Walker, Smith and Woolford.

For the nine months ended September 30, 2022, total fees paid to Walker, Smith, and Woolford were $ 56,250 , $ 56,250 , and $ 22,500 , respectively.

Note 9 — Commitments and Contingencies

4 unchanged sentences

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 June 30, 2023 and December 31, 2022 (See Note 5 – Accrued Liabilities).

The liability has been recorded and included in accrued liabilities on the consolidated balance sheets as of September 30, 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.

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

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 .

The lease is for 7,397 square feet of office

space that expires February 28, 2030.

In March 2022, the Company entered into a new lease to move its corporate headquarters to 1177 West Loop South, Suite 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 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 Company also leased office furniture for its corporate headquarters under a lease agreement effective April 2019 which expired July 2023.

In March 2021, the Company extended its lease for office space at 716 Congress Ave, Suite 100 in Austin, Texas with an effective date of January 1, 2022.

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

For the three months ended June 30, 2023 and 2022, the Company incurred rent expense of $ 78,725 and $ 52,183 , respectively, for the combined leases.

For the six months ended June 30, 2023 and 2022, the Company incurred rent expense of $ 158,486 and $ 103,561 , respectively, for the combined leases.

Supplemental balance sheet information related to operating leases is included in the table below as of June 30, 2023:

For the three months ended September 30, 2023 and 2022, the Company incurred rent expense of $ 73,496 and $ 89,452 , respectively, for the combined leases.

For the nine months ended September 30, 2023 and 2022, the Company incurred rent expense of $ 231,982 and $ 193,013 , respectively, for the combined leases.

Supplemental balance sheet information related to operating leases is included in the table below as of September 30, 2023:

Operating lease right-of-use asset

2 unchanged sentences

Total operating lease liability

The weighted-average remaining lease term for the Company’s operating lease is 6.35 years as June 30, 2023, with a weighted-average discount rate of 8 %.

The weighted-average remaining lease term for the Company’s operating lease is 6.25 years as of September 30, 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:

4 unchanged sentences

Stockholders’ Equity – Initial Public Offering

Following the completion of the Organizational Transactions, DDH LLC’s limited liability company agreement was amended and restated to, among other things, appoint the Company as the sole managing member of DDH LLC and effectuate a recapitalization of all outstanding preferred units and common units into (i) economic nonvoting units of DDH LLC held by the Company and, through their indirect ownership of 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.

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, its Chairman and Chief Executive Officer and its President, and (ii) noneconomic voting units of DDH LLC, 100 % of which are held by the Company.

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 June 30, 2023, DDM held 11,278,000 shares of Class B common stock.

As of September 30, 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.

2 unchanged sentences

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

At June 30, 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 June 30, 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 June 30, 2023.

At September 30, 2023, 2,797,800 of these warrants are outstanding and the intrinsic value of these warrants is $ 0 .

The underwriters in the 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, 2023, 420,000 of these warrants are outstanding.

connection with the Company’s initial public offering, the Company 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, 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 June 30, 2023, and relate to executive performance bonuses which are payable upon a certain level of cash generated by warrant exercises.

The offering expenses recorded in accrued liabilities are approximately $ 1,000,000 as of September 30, 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.

7 unchanged sentences

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 June 30, 2023:

The following table summarizes warrant activity as of September 30, 2023:

Weighted Average

4 unchanged sentences

Outstanding at January 1, 2023

Outstanding at June 30, 2023

Exercisable at June 30, 2023

Outstanding at September 30, 2023

Exercisable at September 30, 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.

In connection with the IPO, the Company adopted the 2022 Omnibus Incentive Plan (“2022 Omnibus Plan”) to facilitate the grant of equity awards to the Company’s employees, consultants 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.

During the six months ended June 30, 2023, the Company recognized $ 304,013 of total stock-based compensation expense in the consolidated statement of operations in compensation, tax and benefits.

During the nine months ended September 30, 2023, the Company recognized $ 545,504 of total stock-based compensation expense in the consolidated statement of operations in 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 June 30, 2023:

The following table summarizes the stock option activity under the 2022 Omnibus Plan as of September 30, 2023:

Stock Options

4 unchanged sentences

Intrinsic Value

Outstanding at December 31, 2022

Outstanding at June 30, 2023

Vested and exercisable at June 30, 2023

As of June 30, 2023, unrecognized stock-based compensation of $ 435,403 related to 289,436 of unvested stock options will be recognized on a straight-line basis over a weighted-average vesting period of 2.45 years.

Outstanding at January 1, 2023

Outstanding at September 30, 2023

Vested and exercisable at September 30, 2023

As of September 30, 2023, unrecognized stock-based compensation of $ 389,598 related to 285,537 of unvested stock options will be recognized on a straight-line basis over a weighted-average vesting period of 2.21 years.

Restricted Stock Units

5 unchanged sentences

Number of Shares

Unvested- December 31, 2022

Unvested- June 30, 2023

Unvested- January 1, 2023

Unvested- September 30, 2023

The majority of vested RSUs were net share settled such that the Company withheld shares with a value equivalent to the employees’ obligation for the applicable income and other employment taxes.

The total shares withheld was 19,568 and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price.

As of June 30, 2023, unrecognized stock-based compensation of $ 1,355,297 related to unvested RSUs will be recognized on a straight- line basis over a weighted average period of 2.21 years.

Note 11 — Income (Loss) Per Share

The total shares withheld were 20,725 and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price.

As of September 30, 2023, unrecognized stock-based compensation of $ 1,159,610 related to unvested RSUs will be recognized on a straight-line basis over a weighted average period of 2.04 years.

Note 11 — Income 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 loss per share:

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

For the Three Months Ended

For the Six Months Ended

Net income (loss)

For the Nine Months Ended

September 30,

Weighted average common shares outstanding - basic

Options to purchase common stock

Unvested restricted stock units

Weighted average common shares outstanding - diluted

Net income (loss) per common share, basic and diluted

Net income per common share, basic

Net income per common share, 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:

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Warrants to purchase common stock

Options to purchase common stock

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

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

Note 12 — Employee Benefit Plans

1 unchanged sentence

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

For the three and six months ended June 30, 2023 and 2022, the Company’s matching contributions were $ 66,083 and $ 52,501 , respectively and $ 130,954 and $ 103,062 , respectively.

For the three and nine months ended September 30, 2023 and 2022, the Company’s matching contributions were $ 53,981 and $ 56,158 , respectively and $ 184,935 and $ 159,219 , respectively.

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

During the three and six months ended June 30, 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.

During the three and nine months ended September 30, 2023 and 2022, no profit-sharing contributions were made.

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 June 30, 2023 and December 31, 2022, the Company analyzed the incurred but not reported claims and recorded an estimated liability, as required.

As of September 30, 2023 and December 31, 2022, the Company analyzed the incurred but not reported claims and recorded an estimated liability, as required within accrued compensation and benefits in accrued liabilities.

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 (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.

In connection with the 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.

7 unchanged sentences

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

As of June 30, 2023, the Company has recorded a deferred tax asset primarily from the outside basis difference in the partnership interest of $ 5,170,870 , and a total TRA liability of $ 4,286,375 , of which $ 40,112 is reflected as a current liability in which $ 752,686 was paid during the six months ended June 30, 2023.

As of September 30, 2023, the Company has recorded a deferred tax asset primarily from the outside basis difference in the partnership interest of $ 5,082,424 , 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 nine months ended September 30, 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.

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.

The Company may elect to defer payments due under the TRA if the Company does not have available cash to satisfy its payment obligations under the TRA.

Any such deferred payments under the TRA generally will accrue interest from the due date for such payment until the payment date.

The Company accounts for any amounts payable under the TRA in accordance with ASC Topic 450, Contingencies, and 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 the IPO and will continue until all tax benefits that are subject to the TRA have been utilized or expired, unless the Company exercises its right to terminate the TRA.

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

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.

1 unchanged sentence

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 for federal and state income tax for the three months ended June 30, 2023 and 2022 and six months ended June 30, 2022 of $ 74,312 , $ 86,676 , and $ 86,676 , respectively, and a tax benefit of $ 336 for the six months ended June 30, 2023.

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

As a result, the Company recorded a tax provision for federal and state income tax for the three months ended September 30, 2023 and 2022 of $ 165,994 and $ 128,436 , respectively, and for the nine months ended September 30, 2023 and 2022 of $ 165,658 and $ 215,112 , respectively.

Income tax expense 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 expense for income taxes and the effective income tax rates were as follows:

For the Three Months Ended

For the Six Months Ended

Income tax expense (benefit)

For the Nine Months Ended

September 30,

Income tax expense

Effective income tax rate

The effective tax rates were lower than the statutory tax rates for the three and six months ended June 30, 2023 primarily due to the Company partnership income that is not subject to federal and state taxes.

The effective tax rates were lower than the statutory tax rates for the three and nine months ended September 30, 2023 primarily due to the Company’s partnership income that is not subject to federal and state taxes.

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

1 unchanged sentence

There are currently no federal or state audits in process.

Note 14 — Correction of Immaterial Error in Prior Consolidated Financial Statements

During the quarter ended September 30, 2023 , the Company identified a prior period accounting error in the Company’s previously reported unaudited interim consolidated financial statements beginning June 30, 2022.

The prior period accounting error resulted from the incorrect accounting for granted but unvested restricted stock units.

Based on management’s evaluation of the error in consideration of the SEC Staff’s Accounting Bulletins Topic 1.M, Materiality and Topic 1.N, Considering the Effects of Misstatements when Quantifying Misstatements in the Current Year Financial Statements and interpretations therewith, the Company concluded the error is not material to the Company’s previously reported financial statements.

Accordingly, the Company’s consolidated balance sheet as of December 31, 2022 and the related consolidated statements of operations and changes in stockholders’ equity for the three and nine months ended September 30, 2022 reflect the correction of these immaterial errors.

Consolidated Balance Sheet as of December 31, 2022

Class A Common Stock Units

Class A Common Stock Amount

Consolidated Statement of Operations for the Nine Months Ended September 30, 2022

Weighted-average number of shares of common stock outstanding - basic

Consolidated Statement of Operations for the Three Months Ended September 30, 2022

Weighted-average number of shares of common stock outstanding - basic

Consolidated Statement of Changes in Stockholders' Equity as of December 31, 2022

Class A Common Stock Units

Class A Common Stock Amount

Consolidated Statement of Changes in Stockholders' Equity as of June 30, 2023

Class A Common Stock Units

Class A Common Stock Amount

Consolidated Statement of Changes in Stockholders' Equity as of June 30, 2022

Class A Common Stock Units

Class A Common Stock Amount

Note 15 — Segment Information

5 unchanged sentences

For the Three Months

For the Six Months Ended

For the Nine Months Ended

September 30,

Buy-side advertising

1 unchanged sentence

Total revenues

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

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

For the Three Months

For the Six Months Ended

For the Nine Months Ended

September 30,

Buy-side advertising

9 unchanged sentences

( 2,525,207 )

Income (loss) before taxes

Income before taxes

Total assets by business segment are as follows:

September 30,

Buy-side advertising

2 unchanged sentences

Note 16 — Subsequent Events

The Company has evaluated events and transactions occurring subsequent to June 30, 2023, through the date of this report and determined there were no events or transactions other than those described below that would require recognition or disclosure.

On July 7, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”), by and among EWB, as lender, and DDH LLC, the Company, Huddled Masses, Colossus Media, and Orange142, as borrowers.

Loans under the 2023 Credit Facility mature on July 7, 2025 (the “Maturity Date”), unless the 2023 Credit Facility is otherwise terminated pursuant to the terms of the Credit Agreement.

At the Company’s option, the Company may at any time prepay the outstanding principal balance of the 2023 Credit Facility in whole or in part, without fee, penalty or premium.

The Company and the other borrowers are required to maintain compliance at all times with the following financial covenants on a consolidated basis:

(i) a fixed charge coverage ratio of not less than 1.25 to 1.0, beginning with the fiscal quarter ended on June 30, 2023 and at the end of each fiscal quarter thereafter;

and (iii) a liquidity covenant requiring the Company and the other borrowers to maintain minimum liquid assets at all times (calculated using unencumbered

cash and cash equivalents and marketable securities), in one or more accounts held with EWB plus Revolving Credit Availability in the amount of $ 1,000,000 .

The obligations under the 2023 Credit Facility are secured by all or substantially all of the borrowers’ assets.

The Credit Agreement contains customary representations and warranties and includes affirmative and negative covenants applicable to the borrowers and their respective subsidiaries.

The negative covenants include, among others, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions.

The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement of the Company or other borrowers.

The Company has evaluated events and transactions occurring subsequent to September 30, 2023, through the date of this report and determined there were no events or transactions other than those described below that would require recognition or disclosure.

On August 29, 2023, the Company filed a Tender Offer Statement on Schedule TO pursuant to which the Company offered to purchase all of its outstanding warrants for $ 1.20 per warrant in cash.

The Tender Offer expired at one minute after 11:59 PM, Eastern Time on September 28, 2023.

The Company accepted all validly tendered warrants for purchase and settlement on October 2, 2023.

As a result of the Tender Offer, a total of 2,213,652 warrants were tendered and not validly withdrawn prior to the expiration of the tender offer for a total purchase price of approximately $ 2.7 million.

On October 23, 2023, the Company distributed a notice of redemption to the registered holders of the remaining outstanding warrants announcing the redemption of those warrants for $ 0.35 per warrant.

The redemption closed on October 30, 2023, and all remaining 1,004,148 warrants were purchased for an aggregate price of approximately $ 0.4 million.

On October 3, 2023, the Company entered into the Fourth Amendment to the 2021 Credit Facility .

Under the terms of the Fourth Amendment, among other changes, the Company entered into a delayed draw term loan under the 2021 Credit Facility in the principal amount of $ 3,587,274.03 (the “ Delayed Draw Term Loan ”) to make payments due, among other things, in connection with the consummation of the 2023 warrant tender offer and fees and expenses incurred in connection therewith.

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

Additionally, the Amendment made certain technical amendments to the negative covenants under the 2021 Credit Facility in order to permit the transactions consummated pursuant to the 2023 warrant tender.

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