Prospectus Supplement No. 6

(to Prospectus dated February 10, 2022)

Filed Pursuant to Rule 424(b)(3)

Registration Statement No. 333-261059

2,800,000 Units Consisting of Shares of Class A

Common Stock and Warrants

Graphic

This prospectus supplement updates and supplements the prospectus dated February 10, 2022 (the “Prospectus”), which forms a part of our Registration Statement on Form S-1. This prospectus supplement is being filed to update and supplement the information in the Prospectus with the information contained in our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2023 (the “Quarterly Report”). Accordingly, we have attached the Quarterly Report to this prospectus supplement.

The Prospectus and this prospectus supplement relate to the offer and sale by us of up to (i) 3,220,000 shares of our Class A common stock, par value $0.001 per share (“Class A common stock”), that may be issued upon the exercise of warrants issued on the closing date of our initial public offering to purchase shares of Class A common stock, (ii) 161,000 warrants to purchase shares of our Class A common stock (“Additional Warrants”) that may be issued upon exercise of unit purchase options issued to the underwriters of our initial public offering and (iii) 161,000 shares of our Class A common stock that may be issued upon exercise of the Additional Warrants.

This prospectus supplement should be read in conjunction with the Prospectus and is not complete without, and may not be delivered or utilized except in combination with, the Prospectus, including any amendments or supplements thereto, which is to be delivered with this prospectus supplement. This prospectus supplement updates and supplements the information in the Prospectus. If there is any inconsistency between the information in the Prospectus and this prospectus supplement, you should rely on the information in this prospectus supplement.

Our common stock is traded on the Nasdaq Capital Market under the symbol “DRCT”. On November 27, 2023, the last reported sale price of our common stock on the Nasdaq Capital Market (“Nasdaq”) was $12.59. Our warrants were traded on Nasdaq under the symbol “DRCTW” until their redemption in full, and subsequent delisting from Nasdaq, on October 30, 2023. There is currently no active trading market for our warrants, nor can there be any assurance that one develops.

We are an “emerging growth company,” as defined under the Securities Act of 1933, as amended, and will be subject to reduced public reporting requirements. This prospectus supplement (including the Prospectus) complies with the requirements that apply to an issuer that is an emerging growth company.

Investing in our securities involves risks. You should review carefully the risks and uncertainties described under the heading “Risk Factors” beginning on page 25 of the Prospectus, and under similar headings in any further amendments or supplements to the Prospectus before you decide whether to invest in our securities.

Neither the Securities and Exchange Commission nor any other regulatory body or state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus supplement is November 28, 2023.


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2023

OR

TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER 001-41261

_________________________________________________________

DIRECT DIGITAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

_________________________________________________________

Delaware

    

87-2306185

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1177 West Loop South,

Suite 1310

Houston, Texas

77027

(Address of principal executive offices)

(Zip code)

(832) 402-1051

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class:

Trading symbol(s)

Name of Each Exchange on Which Registered:

Class A Common Stock, par value $0.001 per share

DRCT

NASDAQ

Warrants to Purchase Common Stock

DRCTW

NASDAQ

Securities registered pursuant to Section 12(g) of the Act: None

________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and  (2) has been subject to such filing requirements for the past 90 days.  Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer

   

Accelerated filer

    

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No  

As of May 12, 2023, there were 2,902,200 shares of the registrant’s Class A common stock outstanding, par value $0.001 per share, and 11,278,000 shares of the registrant’s Class B common stock outstanding, par value $0.001 per share.


TABLE OF CONTENTS

   

 

 

PAGE

ITEM

Part I. Financial Information

3

1.

FINANCIAL STATEMENTS (UNAUDITED)

Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022

3

Consolidated Statements of Operations for the Three Months Ended March 31, 2023 and 2022

4

Consolidated Changes in Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2023 and 2022

5

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022

6

Notes to Consolidated Financial Statements

7

2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

3.

Quantitative and Qualitative Disclosures About Market Risk

38

4.

Controls and Procedures

38

Part II. Other Information

40

1.

Legal Proceedings

40

1A.

Risk Factors

40

2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

3.

Defaults Upon Senior Securities

40

4.

Mine Safety Disclosures

40

5.

Other Information

40

6.

Exhibits

41

Signatures

43

2


PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

March 31, 2023

    

December 31, 2022

ASSETS

 

  

 

  

CURRENT ASSETS

 

  

 

  

Cash and cash equivalents

 

$

6,718,559

$

4,047,453

Accounts receivable, net

 

 

19,050,300

 

26,354,114

Prepaid expenses and other current assets

 

 

1,037,877

 

883,322

Total current assets

 

 

26,806,736

 

31,284,889

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

664,937

673,218

Goodwill

 

6,519,636

 

6,519,636

Intangible assets, net (Note 4)

 

13,149,304

 

13,637,759

Deferred tax asset, net (Note 13)

5,240,074

5,164,776

Operating lease right-of-use assets

 

756,654

 

798,774

Other long-term assets

 

46,987

 

46,987

Total assets

$

53,184,328

$

58,126,039

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

CURRENT LIABILITIES:

 

 

Accounts payable

$

13,786,543

$

17,695,404

Accrued liabilities

 

4,673,785

 

4,777,764

Current portion of liability related to tax receivable agreement

41,141

182,571

Notes payable, current portion

 

818,750

 

655,000

Deferred revenues

 

949,604

 

546,710

Operating lease liabilities, current portion

 

70,014

 

91,989

Income taxes payable

182,840

174,438

Related party payables (Note 8)

 

1,448,333

 

1,448,333

Total current liabilities

 

21,971,010

 

25,572,209

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

 

22,706,526

 

22,913,589

Economic Injury Disaster Loan

 

150,000

 

150,000

Liability related to tax receivable agreement, net of current portion

4,245,234

4,149,619

Operating lease liabilities, net of current portion

 

743,572

 

745,340

Total liabilities

 

49,816,342

 

53,530,757

COMMITMENTS AND CONTINGENCIES (Note 9)

 

 

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

 

3,491

 

3,253

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

 

11,278

 

11,278

Additional paid-in capital

 

8,330,412

 

8,224,012

Accumulated deficit

 

(4,977,195)

 

(3,643,261)

Total stockholders’ equity

 

3,367,986

 

4,595,282

Total liabilities and stockholders’ equity

$

53,184,328

$

58,126,039

See accompanying notes to the unaudited consolidated financial statements.

3


DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

For the Three Months Ended

March 31, 

    

2023

    

2022

Revenues

Buy-side advertising

$

7,439,666

$

5,831,041

Sell-side advertising

13,783,244

5,539,296

Total revenues

21,222,910

11,370,337

Cost of revenues

Buy-side advertising

2,949,153

2,069,346

Sell-side advertising

11,840,706

4,520,192

Total cost of revenues

14,789,859

6,589,538

Gross profit

6,433,051

4,780,799

Operating expenses

Compensation, taxes and benefits

3,634,296

2,555,036

General and administrative

2,940,094

1,640,892

Total operating expenses

6,574,390

4,195,928

(Loss) income from operations

(141,339)

584,871

Other income (expense)

Other income

49,828

47,982

Loss on redemption of non-participating preferred units

(590,689)

Contingent loss on early termination of line of credit

(299,770)

Interest expense

(1,017,301)

(713,787)

Total other expense

(1,267,243)

(1,256,494)

Loss before taxes

(1,408,582)

(671,623)

Tax (benefit)

(74,648)

Net loss

$

(1,333,934)

$

(671,623)

Net loss per common share:

Basic and diluted

$

(0.09)

$

(0.09)

Weighted-average number of shares of common stock outstanding:

Basic and diluted

14,575,845

7,106,471

See accompanying notes to the unaudited consolidated financial statements.

4


DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

Three Months Ended March 31, 2023

    

Common Stock

    

    

    

    

Class A

Class B

Accumulated

Stockholders’

    

Units

    

Amount

    

Units

    

Amount

    

APIC

    

 deficit

    

equity

Balance, December 31, 2022

3,252,764

$

3,253

11,278,000

$

11,278

$

8,224,012

$

(3,643,261)

$

4,595,282

Stock-based compensation

94,538

94,538

Issuance of restricted stock

236,754

236

(236)

Restricted stock forfeitures

(400)

Warrants exercised

2,200

2

12,098

12,100

Net loss

 

 

 

 

 

(1,333,934)

 

(1,333,934)

Balance, March 31, 2023

 

3,491,318

$

3,491

 

11,278,000

$

11,278

$

8,330,412

$

(4,977,195)

$

3,367,986

Three Months Ended March 31, 2022

Common Stock

Stockholders’

Common Units

Class A

Class B

Accumulated

equity

    

Units

    

Amount

    

Units

    

Amount

    

Units

    

Amount

    

APIC

    

 deficit

 (deficit)

Balance, December 31, 2021

 

34,182

$

4,294,241

 

$

 

$

$

$

(4,669,097)

$

(374,856)

Issuance of Class A common stock, net of transaction costs

 

 

 

2,800,000

 

2,800

 

 

 

10,189,993

 

 

10,192,793

Conversion of member units to Class B shares

(28,545)

 

(200)

 

 

 

11,378,000

 

11,378

 

(11,178)

 

 

Redemption of common units

 

(5,637)

(4,294,041)

 

 

 

 

 

(2,905,959)

 

 

(7,200,000)

Distributions to members

 

 

 

 

 

 

 

 

(148,450)

 

(148,450)

Net loss

 

 

 

 

 

 

 

 

(671,623)

 

(671,623)

Balance, March 31, 2022

 

$

 

2,800,000

$

2,800

 

11,378,000

$

11,378

$

7,272,856

$

(5,489,170)

$

1,797,864

See accompanying notes to the unaudited consolidated financial statements.

5


DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

ff

    

For the Three Months Ended March 31, 

    

2023

    

2022

Cash Flows Provided By (Used In) Operating Activities:

  

  

Net loss

 

$

(1,333,934)

$

(671,623)

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

 

Amortization of deferred financing costs

 

 

136,004

 

152,287

Amortization of intangible assets

 

 

488,455

 

488,455

Amortization of right-of-use assets

 

42,120

 

17,602

Amortization of capitalized software

47,654

Depreciation of property and equipment

8,839

Stock-based compensation

 

94,538

 

Deferred income taxes

(75,298)

Payment on tax receivable agreement

(45,815)

Loss on redemption of non-participating preferred units

 

 

590,689

Contingent loss on early termination of line of credit

299,770

Bad debt recovery

 

(120)

(2,425)

Changes in operating assets and liabilities:

Accounts receivable

 

 

7,303,934

119,515

Prepaid expenses and other assets

 

 

(242,391)

304,425

Accounts payable

 

 

(3,908,861)

(926,581)

Accrued liabilities

 

 

(39,479)

80,104

Income taxes payable

8,402

Deferred revenues

 

 

402,894

(916,661)

Operating lease liability

(23,743)

(17,303)

Related party payable

 

 

(70,801)

Net cash provided by (used in) operating activities

 

 

3,162,969

(852,317)

Cash Flows Used In Investing Activities:

Cash paid for capitalized software and property and equipment

(48,212)

Net cash used in investing activities

(48,212)

Cash Flows (Used In) Provided by Financing Activities:

 

 

Payments on term loan

 

 

(163,750)

(137,500)

Payments of litigation settlement

(64,500)

Payment of deferred financing costs

 

 

(227,501)

(185,093)

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

 

 

11,329,818

Redemption of common units

 

 

(3,237,838)

Redemption of non-participating preferred units

(7,046,251)

Proceeds from warrants exercised

 

 

12,100

Distributions to members

 

 

(148,450)

Net cash (used in) provided by financing activities

(443,651)

574,686

Net increase (decrease) in cash and cash equivalents

 

 

2,671,106

(277,631)

Cash and cash equivalents, beginning of the period

 

4,047,453

 

4,684,431

Cash and cash equivalents, end of the period

$

6,718,559

$

4,406,800

Supplemental Disclosure of Cash Flow Information:

 

 

  

Cash paid for taxes

$

650

$

Cash paid for interest

$

879,361

$

559,069

Non-cash Financing Activities:

 

 

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

$

$

1,137,025

Common unit redemption balance included in accrued liabilities

$

$

3,962,162

See accompanying notes to the unaudited consolidated financial statements.

6


DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Organization and Description of Business

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. 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 MassesTM” 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 SSPTM (“Colossus SSP”). In late September 2020, DDH LLC acquired Orange142, LLC (“Orange142”) to further bolster its overall programmatic buy-side advertising platform and to enhance its offerings across multiple industry verticals such as travel, healthcare, education, financial services, consumer products and other sectors with particular emphasis on small and mid-sized businesses transitioning into digital with growing digital media budgets. In February 2022, Direct Digital Holdings, Inc. completed an initial public offering of its securities and, together with DDH LLC, effected a series of transactions (together, the “Organizational Transactions”) whereby Direct Digital Holdings, Inc. became the sole managing member of DDH LLC, the holder of 100% of the voting interests of DDH LLC and the holder of 19.7% of the economic interests of DDH LLC, commonly referred to as an “Up-C” structure. (See Note 8 – Related Party Transactions). In these financial statements, the “Company,” “Direct Digital,” “Direct Digital Holdings,” “DDH,” “we,” “us” and “our” refer (i) following the completion of the Organizational Transactions, including the initial public offering, to Direct Digital Holdings, Inc., and, unless otherwise stated, all of its subsidiaries, including DDH LLC, and, unless otherwise stated, its subsidiaries, and (ii) on or prior to the completion of the Organizational Transactions, to DDH LLC and, unless otherwise stated, its subsidiaries. All of the subsidiaries are incorporated in the state of Delaware, except for DDH LLC, which was formed under the laws of the State of Texas.

The subsidiaries of Direct Digital Holdings, Inc. are as follows:

    

    

Advertising 

    

    

Solution 

Date

Current %

and 

Of

Subsidiary

    

 Ownership

    

Segment

    

Date of Formation

    

Acquisition

Direct Digital Holdings, LLC

 

100.0

%  

N/A

June 21, 2018

August 26, 2018

Huddled Masses, LLC

 

100.0

%  

Buy-side

November 13, 2012

June 21, 2018

Colossus Media, LLC

 

100.0

%  

Sell-side

September 8, 2017

June 21, 2018

Orange142, LLC

 

100.0

%  

Buy-side

March 6, 2013

September 30, 2020

Both buy-side subsidiaries, Huddled Masses and Orange142, offer technology-enabled advertising solutions and consulting services to clients through multiple leading demand side platforms (“DSPs”). Colossus SSP is a stand-alone tech-enabled, data-driven platform that helps deliver targeted advertising to diverse and multicultural audiences, including African Americans, Latin Americans, Asian Americans and 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.

Note 2 — Basis of Presentation and Summary of Significant Accounting Policies

Basis of presentation

The Company’s consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect the financial position, results of operations and cash flows for all periods presented. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on April 17, 2023. 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.

7


The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards otherwise applicable to public companies until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) it affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. The adoption dates discussed below reflect this election.

Basis of consolidation

The consolidated financial statements include the accounts of Direct Digital Holdings, Inc. and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

Business combinations

The Company analyzes acquisitions to determine if the acquisition should be recorded as an asset acquisition or a business combination. The Company accounts for acquired businesses using the acquisition method of accounting under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations, (“ASC 805”), which requires that assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The fair value of the consideration paid, including any contingent consideration as applicable, is assigned to the underlying net assets of the acquired business based on their respective fair values based on widely accepted valuation techniques in accordance with ASC Topic 820, Fair Value Measurement, as of the closing date. Any excess of the purchase price over the estimated fair values of the net tangible assets and identifiable intangible assets acquired is recorded as goodwill.

Significant judgments are used in determining the estimated fair values assigned to the assets acquired and liabilities assumed and in determining estimates of useful lives of long-lived assets. Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future net cash flows, estimates of appropriate discount rates used to calculate the present value of expected future net cash flows, the assessment of each asset’s life cycle, and the impact of competitive trends on each asset’s life cycle and other factors. These judgments can materially impact the estimates used to allocate acquisition date fair values to assets acquired and liabilities assumed, and the resulting timing and amounts charged to, or recognized in, current and future operating results. For these and other reasons, actual results may vary significantly from estimated results.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates include the allocation of purchase price consideration in the business combination and the related valuation of acquired assets and liabilities, intangible assets, and goodwill impairment testing. The Company bases its estimates on past experiences, market conditions, and other assumptions that the Company believes are reasonable under the circumstances, and the Company evaluates these estimates on an ongoing basis.

Cash and cash equivalents

Cash and cash equivalents consist of funds deposited with financial institutions and highly liquid instruments with original maturities of three months or less. Such deposits may, at times, exceed federally insured limits. As of 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.

Accounts receivable

Accounts receivable primarily consists of billed amounts for products and services rendered to customers under normal trade terms. The Company performs credit evaluations of its customers’ financial condition and generally does not require collateral. Accounts receivables are stated at net realizable value. The Company began insuring its accounts receivable with unrelated third-party insurance companies in an effort to mitigate any future write-offs and establishes an allowance for doubtful accounts as deemed necessary for accounts not covered by this insurance. As of March 31, 2023 and December 31, 2022, the Company’s allowance for doubtful accounts

8


was $4,203 and $4,323, respectively. Management periodically reviews outstanding accounts receivable for reasonableness. If warranted, the Company processes a claim with the third-party insurance company to recover uncollected balances, rather than writing the balances off to bad debt expense. The guaranteed recovery for the claim is approximately 90% of the original balance, and if the full amount is collected by the insurance company, the remaining 10% is remitted to the Company. If the insurance company is unable to collect the full amount, the Company records the remaining 10% to bad debt expense. For the three months ended March 31, 2023 and 2022, we recovered $120 and $2,425, respectively, on receivables previously written off.  

Concentrations of credit risk

The Company has customers on both the buy-and sell-side of its business. The following table sets forth our consolidated concentration of accounts receivable:

    

March 31, 

    

December 31, 

 

    

2023

    

2022

 

Customer A

 

67.3

%  

79.8

%

Customer H

 

8.7

%  

5.0

%

Property and equipment, net

Property and equipment are recognized in the consolidated balance sheets at cost less accumulated depreciation and amortization. The Company capitalizes purchases and depreciates its property and equipment using the straight-line method of depreciation over the estimated useful lives of the respective assets, generally ranging from three to five years. Leasehold improvements are amortized over the shorter of their useful lives or the remaining terms of the related leases.

The cost of repairs and maintenance are expensed as incurred. Major renewals or improvements that extend the useful lives of the assets are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed, and any resulting gain or loss is recognized in the consolidated statements of operations.

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.

Goodwill

Under the purchase method of accounting pursuant to ASC 805, goodwill is calculated as the excess of purchase price over the fair value of the net tangible and identifiable intangible assets acquired. In testing goodwill for impairment, we have the option to begin with a qualitative assessment, commonly referred to as “Step 0”, to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry and market considerations, cost factors, entity-specific financial performance and other events, such as changes in our management, strategy and primary user base. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative goodwill impairment analysis is performed, which is referred to as “Step 1”. Depending upon the results of the Step 1 measurement, the recorded goodwill may be written down, and an impairment expense is recorded in the consolidated statements of operations when the carrying amount of the reporting unit exceeds the fair value of the reporting unit. Goodwill is reviewed annually and tested for impairment upon the occurrence of a triggering event.

As of 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

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.

9


Impairment of long-lived assets

The Company evaluates long-lived assets, including property and equipment, and acquired intangible assets consisting of customer relationships, trademarks and trade names, and non-compete agreements, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is assessed based on the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds its estimated fair value and is recognized as a reduction in the carrying amount of the asset. As of 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, which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and requires certain disclosures about fair value measurements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the most advantageous market for the asset or liability in an orderly transaction. Fair value measurement is based on a hierarchy of observable or unobservable inputs. The standard describes three levels of inputs that may be used to measure fair value.

Level 1 — Inputs to the valuation methodology are quoted prices available in active markets for identical securities as of the reporting date;

Level 2 — Inputs to the valuation methodology are other significant observable inputs, including quoted prices for similar securities, interest rates, credit risk etc. as of the reporting date, and the fair value can be determined through the use of models or other valuation methodologies; and

Level 3 — Inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity of the securities and the reporting entity makes estimates and assumptions relating to the pricing of the securities, including assumptions regarding risk.

We segregate all financial assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.

Deferred financing costs

The Company records costs related to its line of credit and the issuance of debt obligations as deferred financing costs. These costs are deferred and amortized to interest expense using the straight-line method over the life of the debt. In December 2021, the Company amended its line of credit with East West Bank (see Note 6 – Long-Term Debt) and incurred additional deferred financing costs of $4,613 during the three months ended March 31, 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. 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.

10


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.

Revenue recognition

The Company adopted FASB ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”), as of January 1, 2019, for all contracts not completed as of the date of adoption and this has had no impact on the financial position or results of operations using the modified retrospective method. The Company recognizes revenue using the following five steps:

Identification of a contract(s) with a customer;
Identification of the performance obligation(s) in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligation(s) in the contract; and
Recognition of revenue when, or as, the performance obligation(s) are satisfied.

The Company’s revenues are derived primarily from two sources: buy-side advertising and sell-side advertising.

Buy-side advertising

The Company purchases media based on the budget established by its customers with a focus on leveraging data services, customer branding, real-time market analysis and micro-location advertising. The Company offers its services on a fully managed and a self-serve basis, which is recognized over time using the output method when the performance obligation is fulfilled. An “impression” is delivered when an advertisement appears on pages viewed by users. The performance obligation is satisfied over time as the volume of impressions are delivered up to the contractual maximum for fully managed revenue and the delivery of media inventory for self-serve revenue. Many customers run several different campaigns throughout the year to capitalize on different seasons, special events and other happenings at their respective regions and localities. The Company provides digital advertising and media buying capabilities with a focus on generating measurable digital and financial life for its customers.

Revenue arrangements are evidenced by a fully executed insertion order (“IO”). Generally, IOs specify the number and type of advertising impressions to be delivered over a specified time at an agreed upon price and performance objectives for an ad campaign. Performance objectives are generally a measure of targeting, as defined by the parties in advance, such as number of ads displayed, consumer clicks on ads or consumer actions (which may include qualified leads, registrations, downloads, inquiries or purchases). These payment models are commonly referred to as CPM (cost per impression), CPC (cost per click) and CPA (cost per action). The majority of the Company’s contracts are flat-rate, fee-based contracts.

In instances where the Company contracts with third-party advertising agencies on behalf of their advertiser clients, a determination is made to recognize revenue on a gross or net basis based on an assessment of whether the Company is acting as the principal or an agent in the transaction. The Company is acting as the principal in these arrangements and therefore revenue earned and costs incurred are recognized on a gross basis as the Company has control and is responsible for fulfilling the advertisement delivery, establishing the selling prices and delivering the advertisements for fully managed revenue and providing updates and performing all billing and collection activities for the self-serve proprietary platform.

Cash payments received prior to the Company’s delivery of its services are recorded to deferred revenue until the performance obligation is satisfied. The Company recorded deferred revenue (contract liabilities) to account for billings in excess of revenue recognized, primarily related to contractual minimums billed in advance and customer prepayment, of $949,604 and $546,710 as of March 31, 2023 and December 31, 2022, respectively.

11


Sell-side advertising

The Company partners with publishers to sell advertising inventory to the Company’s existing buy-side clients, as well as its own Colossus Media-curated clients and the open markets (collectively referred to as “buyers”) seeking to access the general market as well as unique multi-cultural audiences. The Company generates revenue from the delivery of targeted digital media solutions, enabling advertisers to connect intelligently with their audiences across online display, video, social and mobile mediums using its proprietary programmatic sell-side platform (“SSP”). The Company refers to its publishers, app developers, and channel partners collectively as its publishers. The Company generates revenue through the monetization of publisher ad impressions on its platform. The Company’s platform allows publishers to sell, in real time, ad impressions to buyers and provides automated inventory management and monetization tools to publishers across various device types and digital ad formats. The Company recognizes revenue when an ad is delivered in response to a winning bid request from ad buyers. The Company is acting as the principal in these arrangements and therefore revenue earned and costs incurred are recognized on a gross basis, as the Company has control and is responsible for fulfilling the advertisement delivery, establishing the selling prices and delivering the advertisements for fully managed revenue and providing updates and performing all billing and collection activities for its self-serve proprietary platform.

The Company maintains agreements with each DSP in the form of written service agreements, which set out the terms of the relationship, including payment terms (typically 30 to 90 days) and access to its platform. In an effort to reduce the risk of nonpayment, the Company has insurance with a third-party carrier for its accounts receivable as noted above.

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

March 31, 

2023

    

2022

 

Customer A

60.3

%  

47.0

%

Customer E

5.6

%  

10.3

%

Customer F

3.6

%  

9.0

%

Cost of revenues

Buy-side advertising

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

Sell-side advertising

The Company pays publishers a fee, which is typically a percentage of the value of the ad impressions monetized through the Company’s platform. Cost of revenues consists primarily of publisher media fees and data center co-location costs. Media fees include the publishing and real-time bidding costs to secure advertising space.

Advertising costs

The Company expenses advertising costs as incurred. Advertising expense incurred during the three months ended 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.

Stock-based compensation

The Company recognizes and measures compensation expense for all stock-based payment awards granted to employees, directors and non-employee directors, including stock options and restricted stock units (“RSUs”) based on the fair value of the awards on the date of grant. The fair value of stock options is estimated using the Black Scholes option pricing model. The grant date fair value of RSUs is based on the prior day closing market price of the Company’s Class A common stock. The Black Scholes option pricing model inputs include the fair value of the Company’s common stock, as well as assumptions regarding the expected common stock price volatility over the term of the stock options, the expected term of the stock options, risk-free interest rates, and the expected dividend yield.

12


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

Income taxes

Effective February 15, 2022, concurrent with the closing of the Company’s initial public offering, the Company entered into a tax receivable agreement (“Tax Receivable Agreement” or “TRA”) with DDH LLC and Direct Digital Management, LLC (“DDM” or the “Continuing LLC Owner”). The TRA provides for certain income (loss) allocations between the Company and DDH LLC under the agreement. DDH LLC is a limited liability company and will continue to be treated as a partnership for federal income tax purposes and, as such, generally will not be subject to any entity-level U.S. federal income tax and certain state and local income taxes. Any taxable income or loss generated by the Company will be allocated to holders of LLC units (“LLC Units”) in accordance with the 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 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 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. ASC 740-10 applies a two-step process to determine the amount of tax benefits or provisions to record in the consolidated financial statements. First, the Company determines whether any amount may be recognized and then determines how much of a tax benefit or provision should be recognized. As of 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. If the Company were to incur an income tax liability in the future, interest on any income tax liability would be reported as interest expense and penalties on any income tax liability would be reported as income taxes. The Company’s conclusion regarding uncertain tax positions may be subject to review and adjustments at a later date based upon ongoing analyses of tax laws regulations and interpretations thereof as well as other factors. See Note 13 – Tax Receivable Agreement and Income Taxes.

Segment information

Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker is its Chairman and Chief Executive Officer. The Company views its business as two reportable segments, buy-side advertising, which includes the results of Huddled Masses and Orange142, and sell-side advertising, which includes the results of Colossus Media.

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

13


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 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:

March 31, 

    

December 31, 

2023

    

2022

Furniture and fixtures

$

127,932

$

118,601

Computer equipment

19,636

16,985

Leasehold Improvements

36,230

Capitalized software

571,850

571,850

Property, equipment and software, gross

755,648

707,436

Less: accumulated depreciation and amortization

(90,711)

(34,218)

Total property, equipment and software, net

$

664,937

$

673,218

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 

Ended

March 31, 

2023

    

2022

Cost of revenue

$

47,654

$

General and administrative

8,839

Total depreciation and amortization

$

56,493

$

14


Note 4 — Intangible Assets

Effective September 30, 2020, the Company acquired 100% of the equity interests of Orange142 for a purchase price of $26,207,981. The acquisition of Orange142 was recorded by allocating the total purchase consideration to the fair value of the net tangible assets acquired, including goodwill and intangible assets, in accordance with ASC 805. The purchase consideration exceeded the fair value of the net assets, resulting in goodwill of $4,095,700 and intangible assets of $18,033,850. Intangible assets consist of $13,028,320 of 10-year amortizable customer relationships, $3,501,200 of 10-year amortizable trademarks and tradenames, and $1,504,330 of 5-year amortizable non-compete agreements. The Company records amortization expense on a straight-line basis over the life of the identifiable intangible assets. For the three months ended 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

Non-compete

    

Customer lists

    

tradenames

    

agreements

    

Total

Fair value at acquisition date

$

13,028,320

$

3,501,200

$

1,504,330

$

18,033,850

Accumulated amortization

 

(3,257,080)

 

(875,300)

 

(752,166)

 

(4,884,546)

Intangible assets, net

$

9,771,240

$

2,625,900

$

752,164

$

13,149,304

Estimated life (years)

 

10.0

 

10.0

 

5.0

 

  

Weighted-average remaining life (years)

 

7.5

7.5

 

2.5

 

  

    

Total

2023

    

$

1,465,364

2024

 

1,953,818

2025

 

1,878,602

2026

 

1,652,952

2027

 

1,652,952

Thereafter

 

4,545,616

Total future amortization expense

$

13,149,304

The Company expects to deduct goodwill for tax purposes in future years. The factors that make up goodwill include entry into new markets not previously accessible and generation of future growth opportunities.

Note 5 — Accrued Liabilities

Accrued liabilities consisted of the following:

    

March 31, 

    

December 31, 

    

2023

    

2022

Accrued compensation and benefits

$

3,312,350

$

4,128,505

Accrued litigation settlement

 

364,596

 

429,096

Accrued expenses

 

712,631

 

206,639

Accrued severance

271,495

Accrued interest

 

12,713

 

13,524

Total accrued liabilities

$

4,673,785

$

4,777,764

On July 10, 2019, Huddled Masses was named as a defendant in a lawsuit related to a delinquent balance to a vendor. On July 28, 2022, the Company entered into a settlement agreement with the vendor and agreed to pay a total of $515,096 with monthly installment payments over 24 months beginning September 1, 2022.

15


Note 6 — Long-Term Debt

Revolving Line of Credit - East West Bank

On September 30, 2020, the Company entered into a credit agreement that provided for a revolving credit facility with East West Bank in the amount of $4,500,000 with an initial availability of $1,000,000 (the “Revolving Credit Facility”). On December 17, 2021, the Company amended the Revolving Credit Facility, which increased the amount of the revolving loan to $5,000,000 with an initial availability of $2,500,000, 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 

 

Ended

 

March 31, 

    

2023

    

2022

Interest expense – East West Bank

$

$

9,605

Amortization of deferred financing costs

 

 

33,896

Total interest expense and amortization of deferred financing costs

$

$

43,501

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 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”). The loans under the 2021 Credit Facility bear interest at LIBOR plus the applicable margin minus any applicable impact discount. The applicable margin under the 2021 Credit Facility is determined based on the consolidated total net leverage ratio of the Company and its consolidated subsidiaries, at a rate of 6.50% per annum if the consolidated total net leverage ratio is less than 2.00 to 1.00 and up to 9.00% per annum if the consolidated total net leverage ratio is greater than 4.00 to 1.00. The applicable impact discount under the 2021 Credit Facility is a discount of 0.05% per annum to the extent that DDH LLC adopts certain services

16


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.  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.

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 as well as costs associated with the transaction.  

Pursuant to the Term Loan Amendment, DDH LLC will indemnify the Company from and against any claims, losses, expenses and other liabilities incurred by the Company arising from the Company’s guarantor obligations under the 2021 Credit Facility and related term loan documents. The Delayed Draw Loan is required to be repaid in quarterly installments payable on the last day of each fiscal quarter in an amount equal to (i) commencing with the fiscal quarter ending December 31, 2022 through and including the fiscal quarter ending December 31, 2023, $26,250, and (ii) commencing March 31, 2024 and continuing on the last day of each fiscal quarter thereafter, $52,500, with a final installment due December 3, 2026 in an amount equal to the remaining entire principal balance thereof. After giving effect to the Delayed Draw Loan on the effective date of the Term Loan Amendment, no additional delayed draw loans will be available under the 2021 Credit Facility.

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

March 31, 

2023

    

2022

Interest expense – Lafayette Square

$

879,362

$

487,500

Amortization of deferred financing costs – Lafayette Square

 

136,004

 

118,391

Total interest expense and amortization of deferred financing costs

$

1,015,366

$

605,891

U.S. Small Business Administration Loans

Economic Injury Disaster Loan

In 2020, the Company applied and was approved for a loan pursuant to the Economic Injury Disaster Loan (“EIDL”), administered by the U.S. Small Business Administration (“SBA”). The Company received the loan proceeds of $150,000 on June 15, 2020. The loan bears interest at a rate of 3.75% and matures on June 15, 2050. Installment payments, including principal and interest, of $731 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 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

In 2020, the Company applied and was approved for a loan pursuant to the Paycheck Protection Program (“PPP”), administered by the SBA (the “PPP-1 Loan”). The PPP was authorized in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and was designed to provide a direct financial incentive for qualifying business to keep their workforce employees. The SBA made PPP loans

17


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

2023

    

$

491,250

2024

 

 

1,310,000

2025

 

 

1,310,473

2026

 

 

22,411,965

2027

 

 

3,337

Thereafter

 

142,975

Total

 

25,670,000

Less current portion

 

(818,750)

Less deferred financing costs

 

(1,994,724)

Long-term debt, net

$

22,856,526

Note 7 — Mandatorily Redeemable Preferred Units

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

In connection with the acquisition of Orange142, DDH LLC issued mandatorily redeemable preferred units that are only redeemable for a fixed amount of cash at a date specific to each class. Due to the mandatory redemption feature, ASC 480 requires that these preferred units be classified as a liability rather than as a component of equity, with preferred annual returns being accrued and recorded as interest expense.

Class B Preferred Units

In connection with the Orange142 acquisition, DDH LLC issued 7,076 non-voting Class B Preferred Units at a purchase price of $7,046,251, and a fair value of $6,455,562. Class B Preferred Units were mandatorily redeemable for $7,046,251 on September 30, 2024, with 7% preferred annual returns paid on a quarterly basis. Due to the mandatory redemption feature, ASC 480 requires that the Class B Preferred Units be classified as a liability rather than as a component of equity, with the preferred annual returns being accrued and recorded as interest expense.

18


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 $62,162, for the three months ended March 31, 2022 and 2021, respectively.

Note 8 — Related Party Transactions

Related Party Transactions

Member Payable

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 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 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. Additionally, the Continuing LLC Owner may, from time to time, redeem or exchange its LLC Units for shares of our Class A common stock on a one-for-one basis. The Up-C structure also provides the Continuing LLC Owner with potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded. If we ever generate sufficient taxable income to utilize the tax benefits, Digital Direct Holdings expects to benefit from the Up-C structure because, in general, we expect cash tax savings in amounts equal to 15% of certain tax benefits arising from such redemptions or exchanges of the Continuing LLC Owner's LLC Units for Class A common stock or cash and certain other tax benefits covered by the TRA. (See Note 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:

As of 

As of

March 31, 

December 31, 

    

2023

    

2022

Tax Receivable Agreement Liabilities

Short Term

$

41,141

$

182,571

Long Term

4,245,234

4,149,619

Net total deferred tax assets

$

4,286,375

$

4,332,190

Board Services and Consulting Agreement

On September 30, 2020, the Company entered into board services and consulting agreements with Walker, Smith and Leah Woolford (“Woolford”). Walker, Smith and Woolford were then all members of DDH LLC. Prior to the Organizational Transactions, Walker served as a Manager on the Board of Managers of DDH LLC, and now serves as Chairman of the Board of Directors and Chief Executive Officer of the Company. Prior to the Organizational Transactions, Smith served as a Manager on the Board of Managers of DDH LLC and now serves as a director on the Board of Directors and President of the Company. Woolford previously served as a Manager on the Board of Managers of DDH LLC and Senior Advisor of DDH LLC. In exchange for these services, the Company paid Walker and Smith annual fees of $450,000 each and employee benefits for their direct families. The Company paid Woolford $300 per hour for up to 50 hours per month and employee benefits for Woolford and her direct family. In connection with the Organizational Transactions, the consulting agreements were canceled, and for the three months ended 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.

19


Note 9 — Commitments and Contingencies

Litigation

The Company may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. In management’s opinion, the outcome of any such 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.

Huddled Masses was named as a defendant in a lawsuit on July 10, 2019 related to a delinquent balance to a vendor. On July 28, 2022, the Company entered into a settlement agreement with the vendor and agreed to pay a total of $515,096 with monthly installment payments over 24 months beginning September 1, 2022.  The liability has been recorded and included in accrued liabilities on the consolidated balance sheets as of 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 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. 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 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:

    

2023

Operating lease - right-of-use asset

$

756,654

Operating lease liabilities - current

$

70,014

Operating lease liabilities - long-term

 

743,572

Total lease liability

$

813,586

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:

2023

    

$

121,831

2024

 

110,215

2025

 

156,077

2026

 

159,755

2027

 

163,474

Thereafter

 

413,729

Total lease payments

 

1,125,081

Less imputed interest

 

(311,495)

Total lease liability

$

813,586

20


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, 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 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.

On February 15, 2022, the Company completed its initial public offering of 2,800,000 units (“Units”), each consisting of (i) one share of our Class A common stock and (ii) one warrant entitling the holder to purchase one share of our Class A Common Stock at an exercise price of $5.50 per share. The warrants became immediately exercisable upon issuance and are exercisable for a period of five years after the issuance date. The shares of Class A Common Stock and warrants 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 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 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 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 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.

The warrants had a fair value of $0 that was calculated using the Black-Scholes option -pricing model. Variables used in the Black-Scholes option-pricing model include: (1) discount rate of 1.94% based on the applicable U.S. Treasury bill rate, (2) expected life of 5 years, (3) expected volatility of approximately 66% based on the trading history of similar companies, and (4) zero expected dividends.

21


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

Warrants

Weighted Average

Weighted Average

Contractual Life

Aggregate

    

Shares

    

Exercise Price

    

(in years)

    

Intrinsic Value

Outstanding at January 1, 2023

 

3,220,000

$

5.50

 

4.38

$

Granted

 

$

 

$

Exercised

 

(2,200)

$

5.50

 

$

Canceled

 

$

 

$

Outstanding at March 31, 2023

 

3,217,800

$

5.50

 

4.38

$

Exercisable at March 31, 2023

 

3,217,800

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 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 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 March 31, 2023:

Stock Options

    

    

    

Weighted Average

    

Weighted Average

Contractual Life

Aggregate

Shares

Exercise Price

(in years)

Intrinsic Value

Outstanding at December 31, 2022

 

254,000

$

1.69

 

9.44

 

$

19,486

Granted

 

135,015

$

3.96

 

9.97

$

24,303

Exercised

 

$

 

$

Forfeited

 

(400)

$

1.62

 

$

908

Outstanding at March 31, 2023

 

388,615

$

2.48

 

9.47

$

393,705

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.

22


Restricted Stock Units

RSUs vest annually on the grant date anniversary over a period of three years. A summary of RSU activity and related information is as follows:

Restricted Stock Units

Weighted Average

Grant Date Fair Value

    

Number of Shares

    

per Share

Unvested- December 31, 2022

352,764

$

1.67

Granted

 

236,754

3.93

Exercised

 

 

Forfeited

 

(400)

$

1.62

Canceled

 

 

Unvested- March 31, 2023

 

589,118

$

2.58

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 loss per share.

 

For the Three Months Ended

 

March 31, 

    

2023

    

2022

Net loss

$

(1,333,934)

$

(671,623)

Weighted average common shares outstanding - basic

 

14,575,845

 

7,106,471

Options to purchase common stock

 

 

Restricted stock

 

 

Weighted average common shares outstanding - diluted

 

14,575,845

 

7,106,471

Net loss per common share, basic and diluted

$

(0.09)

$

(0.09)

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:

 

March 31, 

    

2023

    

2022

Warrants to purchase common stock

 

3,217,800

 

3,220,000

Options to purchase common stock

 

388,615

 

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

 

3,606,415

 

3,220,000

Note 12 — Employee Benefit Plans

The Company sponsors a safe harbor, defined contribution 401(k) and profit-sharing plan (the “Plan”) that allows eligible employees to contribute a percentage of their compensation. The Company matches employee contributions up to a maximum of 100% of the participant’s salary deferral, limited to 4% of the employee’s salary. For the three 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 months ended March 31, 2023 and 2022, no profit-sharing contributions were made.

23


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 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 (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, 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. The blended tax rate consists of the U.S. federal income tax rate and assumed combined state and local income tax rate driven by the apportionment factors applicable to each state. Any taxable income or loss generated by the Company will be allocated to TRA Holders in accordance with the TRA, and distributions to the owners of LLC Units in an amount sufficient to fund their tax obligations will be made. Pursuant to the Company’s election under Section 754 of the Code, the Company expects to obtain an increase in its share of the tax basis in the net assets of DDH, LLC when LLC interests are redeemed or exchanged by the members of DDH, LLC. The Company plans to make an election under Section 754 if the Code for each taxable year in which a redemption or exchange of LLC interest occurs.  During the 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. Any such deferred payments under the TRA generally will accrue interest from the due date for such payment until the payment date. We account for any amounts payable under the TRA in accordance with ASC Topic 450, Contingencies, and will recognize subsequent period changes to the measurement of the liability from the TRA in the statement of operations as a component of income before taxes.

The term of the TRA commenced upon completion of our IPO and will continue until all tax benefits that are subject to the TRA have been utilized or expired, unless we exercise our right to terminate the TRA. If we elect to terminate the TRA early (or it is terminated early due to changes in control), our obligations under the TRA would accelerate and we would be required to make an immediate payment equal to the present value of the anticipated future payments to be made by us under the TRA.

Income Taxes

Through the Organizational Transactions completed in February 2022, the Company formed an Up-C structure which allows DDM to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership for U.S. federal income tax purposes. Under the 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.

24


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

March 31, 

    

2023

    

2022

Benefit for income taxes

$

(74,648)

$

Effective income tax rate

 

5.3

%

 

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

Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker is its Chairman and Chief Executive Officer. The Company views its business as two reportable segments, buy-side advertising, which includes the results of Huddled Masses and Orange142, and sell-side advertising, which includes the results of Colossus Media. All of the Company’s revenues are attributed to the United States.

Revenue by business segment is as follows:

 

March 31, 

    

2023

    

2022

Buy-side advertising

$

7,439,666

$

5,831,041

Sell-side advertising

13,783,244

 

5,539,296

Total revenues

$

21,222,910

$

11,370,337

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

 

March 31, 

    

2023

    

2022

Buy-side advertising

$

1,504,861

$

1,074,210

Sell-side advertising

 

1,278,332

 

651,042

Corporate office expenses

 

(2,924,532)

 

(1,140,381)

Total operating income (loss)

(141,339)

584,871

Corporate other expense

(1,267,243)

(1,256,494)

Loss before taxes

$

(1,408,582)

$

(671,623)

Total assets by business segment are as follows:

March 31, 

December 31, 

    

2023

    

2022

Buy-side advertising

$

25,840,255

$

25,685,528

Sell-side advertising

 

20,140,458

 

25,512,367

Corporate office

 

7,203,615

 

6,928,144

Total assets

$

53,184,328

$

58,126,039

25


Note 15 — Subsequent Events

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.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion together with our unaudited consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled “Risk Factors” in our Annual Report on Form 10-K or in other parts of this Quarterly Report on Form 10-Q. See “– Cautionary Note Regarding Forward-Looking Statements” below. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws and which are subject to certain risks, trends and uncertainties. We use words such as “could,” “would,” “may,” “might,” “will,” “expect,” “likely,” “believe,” “continue,” “anticipate,” “estimate,” “intend,” “plan,” “project” and other similar expressions to identify forward-looking statements, but not all forward-looking statements include these words. All of our forward-looking statements involve estimates and uncertainties that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Accordingly, any such statements are qualified in their entirety by reference to the information described under the caption “Risk Factors” in our Annual Report on Form 10-K and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control) and assumptions.

Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance expressed in or implied by the forward-looking statements. We believe these factors include, but are not limited to, the following:

our dependence on the overall demand for advertising, which could be influenced by economic downturns;
any slow-down or unanticipated development in the market for programmatic advertising campaigns;
the effects of health epidemics;
operational and performance issues with our platform, whether real or perceived, including a failure to respond to technological changes or to upgrade our technology systems;
any significant inadvertent disclosure or breach of confidential and/or personal information we hold, or of the security of our or our customers’, suppliers’ or other partners’ computer systems;
any unavailability or non-performance of the non-proprietary technology, software, products and services that we use;
unfavorable publicity and negative public perception about our industry, particularly concerns regarding data privacy and security relating to our industry’s technology and practices, and any perceived failure to comply with laws and industry self-regulation;
restrictions on the use of third-party “cookies,” mobile device IDs or other tracking technologies, which could diminish our platform’s effectiveness;
any inability to compete in our intensely competitive market;
any significant fluctuations caused by our high customer concentration;
our limited operating history, which could result in our past results not being indicative of future operating performance;
any violation of legal and regulatory requirements or any misconduct by our employees, subcontractors, agents or business partners;

26


any strain on our resources, diversion of our management’s attention or impact on our ability to attract and retain qualified board members as a result of being a public company;
as a holding company, we depend on distributions from Direct Digital Holdings, LLC (“DDH LLC”) to pay our taxes, expenses (including payments under the Tax Receivable Agreement) and dividends;
DDH LLC may make distributions of cash to us substantially in excess of the amounts we use to make distributions to our stockholders and pay our expenses (including our taxes and payments under the Tax Receivable Agreement), which, to the extent not distributed as dividends on our Class A common stock, would benefit Direct Digital Management, LLC, the entity indirectly owned by our Chairman and Chief Executive Officer and President, as a result of its ownership of Class A common stock upon an exchange or redemption of its LLC Units; and
other factors and assumptions discussed under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Should one or more of these risks or uncertainties materialize or should any of these assumptions prove to be incorrect, our actual operating and financial performance may vary in material respects from the performance projected in these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors that could cause our business not to develop as we expect emerge from time to time, and it is not possible for us to predict all of them. Further, we cannot assess the impact of each currently known or new factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Overview

Direct Digital Holdings, Inc. and its subsidiaries (collectively the “Company,” “DDH,” “we,” “us” and “our”), 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. (“Holdings”) is the holding company that, since the completion of our initial public offering on February 15, 2022, owns certain common units, and serves as the manager, of DDH LLC, which operates the business formed in 2018 through the acquisition of Huddled Masses LLC (“Huddled Masses™” or, “Huddled Masses”) a buy-side marketing platform, and Colossus Media LLC (“Colossus Media”) a sell-side marketing platform.

On September 30, 2020, DDH LLC acquired Orange142, LLC (“Orange142”) to further bolster its overall programmatic buy-side advertising platform and 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.

The subsidiaries of Direct Digital Holdings, Inc. are as follows:

    

    

Advertising

    

    

Solution

Date

Current %

and

of

Subsidiary

   

Ownership

   

Segment

   

Date of Formation

   

Acquisition

Direct Digital Holdings, LLC

100

%  

N/A