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Table of Contents

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, 2022

OR

TRANSITION REPORT PURSUANT TO 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

    

83-0662116

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1233 West Loop South,

Suite 1170

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, 2022, there were 2,800,000 shares of the registrant’s Class A common stock outstanding, par value $0.001 per share, and 11,378,000 shares of the registrant’s Class B common stock outstanding, par value $0.001 per share.

Table of Contents

TABLE OF CONTENTS

   

 

 

PAGE

ITEM

Part I. Financial Information

3

1.

FINANCIAL STATEMENTS (UNAUDITED)

Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021

3

Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021

4

Consolidated Changes in Stockholders’ / Members’ Equity (Deficit) for the three months ended March 31, 2022 and 2021

5

Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021

6

Notes to Consolidated Financial Statements

7

2.

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

23

3.

Quantitative and Qualitative Disclosures About Market Risk

35

4.

Controls and Procedures

35

Part II. Other Information

35

1.

Legal Proceedings

35

1A.

Risk Factors

36

2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

3.

Defaults Upon Senior Securities

36

4.

Mine Safety Disclosures

36

5.

Other Information

36

6.

Exhibits

37

Signatures

40

2

Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

    

March 31, 2022

    

December 31, 2021

ASSETS

 

  

 

  

CURRENT ASSETS

 

  

 

  

Cash and cash equivalents

 

$

4,406,800

$

4,684,431

Accounts receivable, net

 

 

7,754,091

 

7,871,181

Prepaid expenses and other current assets

 

 

875,928

 

1,225,447

Total current assets

 

 

13,036,819

 

13,781,059

Goodwill

 

6,519,636

 

6,519,636

Intangible assets, net (Note 3)

 

15,103,123

 

15,591,578

Deferred financing costs, net (Note 2)

 

66,869

 

96,152

Operating lease - right-of-use assets

 

917,877

 

Other long-term assets

 

56,602

 

11,508

Total assets

$

35,700,926

$

35,999,933

LIABILITIES AND MEMBERS' EQUITY

 

  

 

  

CURRENT LIABILITIES:

 

  

 

  

Accounts payable

$

5,920,459

$

6,710,015

Accrued liabilities

 

6,087,173

 

1,044,907

Notes payable, current portion

 

687,500

 

550,000

Deferred revenues

 

431,432

 

1,348,093

Operating lease liabilities, current portion

 

209,914

 

Related party payables (Note 7)

 

-

 

70,801

Total current liabilities

 

13,336,478

 

9,723,816

Notes payable, net of short-term portion and deferred financing cost of $2,153,821 and $2,091,732, respectively

 

19,021,179

 

19,358,268

Mandatorily redeemable non-participating preferred units

 

 

6,455,562

Line of credit

 

400,000

 

400,000

Paycheck Protection Program loan

 

287,143

 

287,143

Economic Injury Disaster Loan

 

150,000

 

150,000

Operating lease liabilities, net of current portion

 

708,262

 

Total liabilities

 

33,903,062

 

36,374,789

COMMITMENTS AND CONTINGENCIES (Note 8)

 

  

 

  

STOCKHOLDERS’ / MEMBERS' EQUITY (DEFICIT)

 

  

 

  

Units, 1,000,000 units authorized at December 31, 2021; 34,182 units issued and outstanding as of December 31, 2021

 

 

4,294,241

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

 

2,800

 

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

 

11,378

 

Additional paid-in capital

 

7,272,856

 

Accumulated deficit

 

(5,489,170)

 

(4,669,097)

Total stockholders’ / members' equity (deficit)

 

1,797,864

 

(374,856)

Total liabilities and stockholders’ / members' equity

$

35,700,926

$

35,999,933

See accompanying notes to the unaudited consolidated financial statements.

3

Table of Contents

DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

    

For the Three Months Ended March 31,

    

2022

    

2021

Revenues

 

  

 

  

Buy-side advertising

 

$

5,831,041

$

4,828,048

Sell-side advertising

 

 

5,539,296

 

865,686

Total revenues

 

 

11,370,337

 

5,693,734

Cost of revenues

 

 

  

 

  

Buy-side advertising

 

 

2,069,346

 

1,954,640

Sell-side advertising

 

 

4,520,192

 

741,693

Total cost of revenues

 

 

6,589,538

 

2,696,333

Gross profit

 

4,780,799

 

2,997,401

Operating expenses

 

  

 

  

Compensation, taxes and benefits

 

 

2,555,036

1,773,081

General and administrative

 

 

1,640,892

1,250,515

Total operating expenses

 

 

4,195,928

3,023,596

Income (loss) from operations

 

 

584,871

(26,195)

Other income (expense)

 

 

  

  

Other income

 

 

47,982

18,659

Forgiveness of Paycheck Protection Program loan

 

 

10,000

Loss on redemption of non-participating preferred units

 

(590,689)

 

Interest expense

 

(713,787)

 

(811,757)

Total other expense

 

(1,256,494)

 

(783,098)

Tax expense

 

 

Net loss

$

(671,623)

$

(809,293)

Net loss per common share / unit:

 

  

 

  

Basic and diluted

$

(0.09)

$

(23.68)

Weighted-average number of common shares / units outstanding:

 

  

 

  

Basic and diluted

 

7,106,471

 

34,182

See accompanying notes to the unaudited consolidated financial statements.

4

Table of Contents

DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

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

(Unaudited)

    

    

    

    

Common Shares

    

    

    

Accumulated

    

Members'

Common Units

Class A

Class B

equity 

equity

    

Units

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

APIC

    

 (deficit)

    

 (deficit)

Balance, December 31, 2020

34,182

$

4,294,241

$

$

$

$

(1,925,951)

$

2,368,290

Distributions to members

 

 

 

 

 

 

 

 

(144)

 

(144)

Net income

 

 

 

 

 

 

 

 

(809,293)

 

(809,293)

Balance, March 31, 2021

 

34,182

$

4,294,241

 

$

 

$

$

$

(2,735,388)

$

1,558,853

    

    

    

Members' /

Common Shares

    

    

    

Accumulated

    

Stockholders'

Common Units

Class A

Class B

equity 

equity

    

Units

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

APIC

    

 (deficit)

    

 (deficit)

Balance, December 31, 2021

34,182

$

4,294,241

$

$

$

$

(4,669,097)

$

(374,856)

Issuance of Class A common shares, 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 income

 

 

 

 

 

 

 

(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.

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DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

    

For the Three Months Ended March 31,

    

2022

    

2021

Cash Flows (Used In) Provided By Operating Activities:

  

  

Net loss

 

$

(671,623)

$

(809,293)

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

 

Amortization of deferred financing costs

 

 

152,287

 

84,629

Amortization of intangible assets

 

 

488,455

 

488,455

Amortization of right-of-use asset

 

17,602

 

Forgiveness of Paycheck Protection Program loan

 

 

(10,000)

Paid-in-kind interest

 

 

95,344

Loss on redemption of non-participating preferred units

 

 

590,689

Bad debt expense recovery

 

 

(2,425)

Changes in operating assets and liabilities:

 

Accounts receivable

 

 

119,515

1,508,681

Prepaid expenses and other current assets

 

 

304,423

(84,211)

Accounts payable

 

 

(926,581)

(717,036)

Accrued liabilities

 

 

80,104

46,148

Deferred revenues

 

 

(916,661)

2,966,693

Operating lease liabilities

(17,303)

Related party payable

 

 

(70,801)

Net cash (used in) provided by operating activities

 

 

(852,317)

3,569,410

Cash Flows Provided By (Used In) Financing Activities:

 

 

  

  

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

 

 

11,329,818

Payments on term loan

 

 

(137,500)

(77,801)

Payment of deferred financing costs

 

 

(185,093)

Redemption of non-participating preferred shares

 

 

(7,046,251)

Redemption of common units

 

 

(3,237,838)

Distributions to members

 

 

(148,450)

(144)

Net cash provided by (used in) financing activities

 

 

574,686

(77,945)

Net (decrease) increase in cash and cash equivalents

 

 

(277,631)

3,491,465

Cash and cash equivalents, beginning of the period

 

4,684,431

 

1,611,998

Cash and cash equivalents, end of the year

$

4,406,800

$

5,103,463

Supplemental Disclosure of Cash Flow Information:

 

  

 

  

Cash paid for taxes

$

$

Cash paid for interest

$

559,069

$

630,281

Non-cash Financing Activities:

 

  

 

  

Transaction costs related to issuances of Class A shares included in accounts payable and 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.

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DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Organization and Description of Business

Direct Digital Holdings, Inc. and its subsidiaries, incorporated as a Delaware corporation on August 23, 2021 and headquartered in Houston, Texas, is an end-to-end, full-service programmatic advertising platform primarily focused on providing advertising technology, data-driven campaign optimization and other solutions to underserved and less efficient markets on both the buy- and sell-side of the digital advertising ecosystem. Direct Digital Holdings, Inc. is the holding company for Direct Digital Holdings, LLC (“DDH LLC”), which is, in turn, the holding company for the business formed by DDH LLC’s founders in 2018 through the acquisition of Huddled Masses, LLC (“Huddled Masses”) and Colossus Media, LLC (“Colossus Media”). Colossus Media operates our proprietary sell-side programmatic platform operating under the trademarked banner of Colossus SSP TM (“Colossus SSP”). In late September 2020, DDH LLC acquired Orange142, LLC (“Orange142”) to further bolster its overall programmatic buy-side advertising platform and to enhance its offerings across multiple industry verticals such as travel, healthcare, education, financial services, consumer products and other sectors with particular emphasis on small and mid-sized businesses transitioning into digital with growing digital media budgets. In February 2022, Direct Digital Holdings, Inc. completed an initial public offering of its securities and, together with DDH LLC, effected a series of transactions (together, the “Organizational Transactions”) whereby Direct Digital Holdings, Inc. became the sole managing member of DDH LLC, the holder of 100% of the voting interests of DDH LLC and the holder of 19.7% of the economic interests of DDH LLC. 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. 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, 2021

Huddled Masses, LLC

 

100.0

%  

Buy-side

November 13, 2012

June 21, 2018

Colossus Media, LLC

 

100.0

%  

Sell-side

September 8, 2017

June 21, 2018

Orange142, LLC

 

100.0

%  

Buy-side

March 6, 2013

September 30, 2020

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

Providing both the front-end, buy-side operations coupled with our proprietary sell-side operations enables us to curate the first through the last mile in the ad tech ecosystem execution process to drive higher results.

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

Basis of presentation

The Company’s consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect the financial position, results of operations and cash flows for all periods presented.

The 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

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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, 2022, $3,135,548 of the Company’s cash and cash equivalents exceeded the federally insured limits. The Company has not experienced any losses in such amounts and believes it is not exposed to any significant credit risk to cash.

Accounts receivable

Accounts receivable primarily consists of billed amounts for products and services rendered to customers under normal trade terms. The Company performs credit evaluations of its customers’ financial condition and generally does not require collateral. Accounts receivables are stated at net realizable value. The Company began insuring its accounts receivable with unrelated third-party insurance companies in an effort to mitigate any future write-offs and establish an allowance for doubtful accounts as deemed necessary for accounts not covered by this insurance. As of March 31, 2022 and December 31, 2021, the Company’s allowance for doubtful accounts was $40,360 and $40,856, respectively. 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

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collect the full amount, the Company records the remaining 10% to bad debt expense. Bad debt expense related to recoveries was $(2,425) and $0 for the three months ended March 31, 2022 and 2021, respectively.

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, 

 

    

2022

    

2021

 

Customer A

 

69.4

%  

62.9

%

Customer B

 

33.9

%  

0.0

%

Customer C

 

0.9

%  

5.2

%

Property and equipment, net

Property and equipment are recognized in the consolidated balance sheets at cost less accumulated depreciation and amortization. The Company capitalizes purchases and depreciates its property and equipment using the straight-line method of depreciation over the estimated useful lives of the respective assets, generally ranging from three to five years. Leasehold improvements are amortized over the shorter of their useful lives or the remaining terms of the related leases. As of March 31, 2022 and December 31, 2021, the Company has fully depreciated all property and equipment.

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

Goodwill

Under the purchase method of accounting pursuant to ASC 805, goodwill is calculated as the excess of purchase price over the fair value of the net tangible and identifiable intangible assets acquired. In testing goodwill for impairment, we have the option to begin with a qualitative assessment, commonly referred to as “Step 0”, to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry and market considerations, cost factors, entity-specific financial performance and other events, such as changes in our management, strategy and primary user base. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative goodwill impairment analysis is performed, which is referred to as “Step 1”. Depending upon the results of that measurement, the recorded goodwill may be written down, and 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, 2022, goodwill was $6,519,636 which includes $2,423,936 as a result of the acquisition of Huddled Masses and Colossus Media in 2018 and $4,095,700 of goodwill recognized from the acquisition of Orange142 in September 2020.

Intangible assets, net

Our intangible assets consist of customer relationships, trademarks and non-compete agreements. Our intangible assets are recorded at fair value at the time of their acquisition and are stated within our consolidated balance sheets net of accumulated amortization. Intangible assets are amortized on a straight-line basis over their estimated useful lives and recorded as amortization expense within general and administrative expenses in our consolidated statements of operations.

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

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amount of the asset exceeds its estimated fair value and is recognized as a reduction in the carrying amount of the asset. As of March 31, 2022 and December 31, 2021, there were no events or changes in circumstances to indicate that the carrying amount of the assets may not be recoverable.

Fair value measurements

The Company follows ASC 820-10, Fair Value Measurement, (“ASC 820-10”), which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and requires certain disclosures about fair value measurements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the most advantageous market for the asset or liability in an orderly transaction. Fair value measurement is based on a hierarchy of observable or unobservable inputs. The standard describes three levels of inputs that may be used to measure fair value.

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

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

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

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

Deferred financing costs

The Company records costs related to its line of credit and the issuance of debt obligations as deferred financing costs. These costs are deferred and amortized to interest expense using the straight-line method over the life of the debt. In December 2021, the Company amended its line of credit with East West Bank (see Note 5 – Long Term Debt) and incurred additional deferred financing costs of $4,613 during the three months ended March 31, 2022. Unamortized deferred financing costs related to the line of credit was $66,869 and $96,152 as of March 31, 2022 and December 31, 2021, respectively, and due to the revolving nature of this debt, was classified as an asset on the consolidated balance sheets.

In December 2021, the Company entered into an agreement with Lafayette Square Loan Servicing, LLC (“Lafayette Square”) (see Note 5 – Long Term Debt) and incurred additional deferred financing costs of $180,480 during the three months ended March 31, 2022. Unamortized deferred financing costs was $2,153,821 and $2,091,732 as of March 31, 2022 and December 31, 2021, respectively, and netted against the outstanding debt on the consolidated balance sheets.

Right-of-use assets

The Company adopted Accounting Standards Update (“ASU”) 2016-02 (“ASU 2016-02”), Leases (Topic 842) as of January 1, 2022, and recognizes operating lease assets and lease liabilities on the balance sheets. The standard requires us to increase our assets and liabilities by equal amounts through the recognition of Right-of-Use (“ROU”) assets and lease liabilities for our operating leases and to recognize the initial and the monthly payments as operating expenses when paid or accrued on our consolidated statements of operations and consolidated statements of cash flows.

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 which had no impact on its 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;

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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 $431,432 and $1,348,093 as of March 31, 2022 and December 31, 2021, respectively.

Sell-side advertising

The Company partners with publishers to sell advertising inventory to the Company’s existing buy-side clients, as well as its own Colossus Media-curated clients and the open markets (collectively referred to as “buyers”) seeking to access the general market as well as unique multi-cultural audiences. The Company generates revenue from the delivery of targeted digital media solutions, enabling advertisers to connect intelligently with their audiences across online display, video, social and mobile mediums using its proprietary programmatic sell-side platform (“SSP”). The Company refers to its publishers, app developers, and channel partners collectively as its 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.

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

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

    

For the Three Months 

Ended

 March 31,

    

2022

    

2021

 

Customer A

47.0

%  

11.0

%

Customer D

 

10.3

%  

20.9

%

Customer E

 

9.0

%  

8.3

%

Customer F

 

0.3

%  

5.9

%

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, 2022 and 2021 was $102,348 and $41,920, respectively. These costs are included in general and administrative expenses in the consolidated statements of operations.

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”). The Tax Receivable Agreement 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 in accordance with the TRA, and distributions to the owners of LLC Units in an amount sufficient to fund their tax obligations will be made. The Company is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss under the TRA. Pursuant to the Company’s election under Section 754 of the Internal Revenue Code (the “Code”), the Company expects to obtain an increase in its share of the tax basis in the net assets of DDH, LLC when LLC interests are redeemed or exchanged by the members of DDH, LLC. The Company plans to make an election under Section 754 if the Code for each taxable year in which a redemption or exchange of LLC interest occurs. As of March 31, 2022, no redemptions or exchanges have been made by the members of DDH, LLC.

The Company applies ASC 740-10, Income Taxes (“ASC 740-10”), in establishing standards for accounting for uncertain tax positions. The Company evaluates uncertain tax positions with the presumption of audit detection and applies a “more likely than not” standard to evaluate the recognition of tax benefits or provisions. ASC 740-10 applies a two-step process to determine the amount of tax benefits or provisions to record in the consolidated financial statements. First, the Company determines whether any amount may be recognized and then determines how much of a tax benefit or provision should be recognized. As of March 31, 2022 and December 31, 2021, the Company had no uncertain tax positions. Accordingly, the Company has not recognized any penalty, interest or tax impact related to uncertain tax positions. If the Company were to incur an income tax liability in the future, interest on any income tax liability would be reported as interest expense and penalties on any income tax liability would be reported as income taxes. The Company’s

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

Segment information

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

Risks and uncertainties

Management is currently evaluating the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position and results of its operations, the specific impact is not readily determinable as of the date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The new lease guidance supersedes Topic 840. The core principle of the guidance is that entities should recognize the assets and liabilities that arise from leases. Topic 840 does not apply to leases to explore for or use minerals, oil, natural gas and similar nonregenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”, which provides entities with an alternative modified transition method to elect not to recast the comparative periods presented when adopting Topic 842. The Company adopted Topic 842 as of January 1, 2019, using the alternative modified transition method, for which, comparative periods, including the disclosures related to those periods, are not restated. In addition, the Company elected practical expedients provided by the new standard whereby, the Company has elected to not reassess its prior conclusions about lease identification, lease classification, and initial direct costs and to retain off-balance sheet treatment of short-term leases (i.e., 12 months or less and does not contain a purchase option that the Company is reasonably certain to exercise). Refer to “Note 10 - Commitments and Contingencies” to our consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q for additional information.

In March 2020, the FASB issued ASU No. 2020-04: Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides temporary optional expedients and exceptions to U.S. GAAP on contract modifications, hedging relationships, and other transactions affected by reference rate reform to ease entities’ financial reporting burdens as the market transitions from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made, hedging relationships entered into, and other transactions affected by reference rate reform, evaluated on or before December 31, 2022, beginning during the reporting period in which the guidance has been elected. Management is currently evaluating the impact of this update, but does not expect this update to have a material impact on the Company’s financial statements.

Liquidity and capital resources

As of March 31, 2022, the company had cash and cash equivalents of $4,406,800 and availability under its Revolving Credit Facility (see Note 5 — Long-Term Debt) of $1,459,383. Based on projections of growth in revenue and operating results in the coming year, the available cash held by us and availability under our Revolving Credit Facility, the Company believes that it will have sufficient cash resources to finance its operations and service any maturing debt obligations for at least the next twelve months following the issuance of these financial statements.

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Note 3 — Intangible Assets

Effective September 30, 2020, the Company acquired 100% of the equity interests of Orange142 for a purchase price of $26,207,981. The acquisition of Orange142 was recorded by allocating the total purchase consideration to the fair value of the net tangible assets acquired, including goodwill and intangible assets, in accordance with ASC 805. The purchase consideration exceeded the fair value of the net assets, resulting in goodwill of $4,095,700 and intangible assets of $18,033,850. Intangible assets consist of $13,028,320 of 10-year amortizable customer relationships, $3,501,200 of 10-year amortizable trademarks and tradenames, and $1,504,330 of 5-year amortizable non-compete agreements. The Company records amortization expense on a straight-line basis over the life of the identifiable intangible assets. For the three months ended March 31, 2022 and 2021, amortization expense of $488,455 and $488,455, respectively, was recognized, and as of March 31, 2022 and December 31, 2021, intangible assets net of accumulated amortization was $15,103,123 and $15,591,578, respectively.

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

    

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

 

(1,954,248)

 

(525,180)

 

(451,299)

 

(2,930,727)

Intangibles, net as of March 31, 2022

$

11,074,072

$

2,976,020

$

1,053,031

$

15,103,123

Estimated life (years)

 

10

 

10

 

5

 

  

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

 

8.5

 

8.5

 

3.5

 

  

o

    

Total

2022

    

1,465,364

2023

 

1,953,818

2024

 

1,953,818

2025

 

1,878,602

2026

 

1,652,952

Thereafter

 

6,198,569

Total

$

15,103,123

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 4 — Accrued Liabilities

Accrued liabilities consisted of the following:

    

March 31,

    

December 31, 

    

 2022

    

2021

Accrued compensation and benefits

$

1,386,736

$

406,510

Accrued litigation fees

 

501,078

 

501,078

Accrued expenses

 

4,183,578

 

123,188

Accrued interest

 

15,781

 

14,201

Total accrued liabilities

$

6,087,173

$

1,044,907

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

Note 5 — Long-Term Debt

Revolving Line of Credit - East West Bank

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

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availability of $2,500,000. The loans under the Revolving Credit Facility bear interest at the LIBOR rate plus 3.5% per annum, and at March 31, 2022 and December 31, 2021, the rate was 7.6% and 7.0%, respectively, with a 0.50% per annum unused line fee. We expect that interest rates applicable to the Revolving Credit Facility will be modified upon the implementation of a LIBOR replacement rate that will apply to our current and future borrowings. The maturity date of the Revolving Credit Facility is September 30, 2022. All accrued but unpaid interest under the Revolving Credit Facility is payable in monthly installments on each interest payment date until the maturity date when the outstanding principal balance, together with all accrued but unpaid interest will be due.

In connection with the amendment, the Company incurred additional deferred financing fees of $63,689 in 2021 and $4,613 during the three months ended March 31, 2022. As of March 31, 2022 and December 31, 2021, the Company had outstanding borrowings under the Revolving Credit Facility of $400,000 and $400,000, respectively, and deferred financing cost of $66,869 and $96,152, respectively, which are classified as an asset on the consolidated balance sheets.

The Revolving Credit Facility is secured by senior liens on all or substantially all of the assets of DDH LLC and its subsidiaries, including a priority lien on the trade accounts receivable of DDH LLC and its subsidiaries. The Revolving Credit Facility includes financial covenants, and as of March 31, 2022 and December 31, 2021, the Company was in compliance with all of its financial covenants.

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

    

For the Three Months 

Ended

 March 31,

    

2022

    

2021

Interest expense – East West Bank

$

9,605

$

9,187

Amortization of deferred financing costs

 

33,896

 

12,944

Total interest expense and amortization of deferred financing costs

$

43,501

$

22,131

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

2020 Term Loan Facility and 2021 Credit Facility

In conjunction with the acquisition of Orange142 on September 30, 2020, the Company entered into a loan and security agreement (the “2020 Term Loan Facility”) with SilverPeak in the amount of $12,825,000, maturing on September 15, 2023. Interest in year one was 15%, of which 12% was payable monthly and 3% was paid-in-kind (“PIK”). All accrued but unpaid interest under the 2020 Term Loan Facility was payable in monthly installments on each interest payment date, and the Company was required to repay the outstanding principal balance on January 15 and July 15 of each calendar year in an amount equal to 37.5% of excess cash flow over the preceding six calendar months until the term loan was paid in full. The remaining principal balance, and all accrued but unpaid interest were to be due on the maturity date.

The obligations under the 2020 Term Loan Facility were secured by first-priority liens on all or substantially all assets of DDH LLC and its subsidiaries. The 2020 Term Loan Facility contained a number of financial covenants and customary affirmative covenants. In addition, the 2020 Term Loan Facility included a number of negative covenants, including (subject to certain exceptions) limitations on (among other things): indebtedness, liens, investments, acquisitions, dispositions, and restricted payments. Each of Mark Walker (“Walker”), Chairman of the Board and Chief Executive Officer, and Keith Smith (“Smith”), President, provided limited guarantees of the obligations under the 2020 Term Loan Facility.

The maturity date of the 2020 Term Loan Facility was September 15, 2023; however, on December 3, 2021, DDH LLC entered into the Term Loan and Security Agreement (the “2021 Credit Facility”) with Lafayette Square and used the proceeds to repay and terminate the 2020 Term Loan Facility.

Lafayette Square

On December 3, 2021, DDH LLC entered into the 2021 Credit Facility with Lafayette Square as administrative agent, and the various lenders thereto. The term loan under the 2021 Credit Facility provides for a term loan in the principal amount of up to $32,000,000, consisting of a $22,000,000 closing date term loan and an up to $10,000,000 delayed draw term loan. The loans under the

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2021 Credit Facility bear interest at LIBOR plus the applicable margin minus any applicable impact discount. The applicable margin under the 2021 Credit Facility is determined based on the consolidated total net leverage ratio of the Company and its consolidated subsidiaries, at a rate of 6.50% per annum if the consolidated total net leverage ratio is less than 2.00 to 1.00 and up to 9.00% per annum if the consolidated total net leverage ratio is greater than 4.00 to 1.00. The applicable impact discount under the 2021 Credit Facility is a discount of 0.05% per annum to the extent that DDH LLC adopts certain services intended to improve overall employee satisfaction and retention plus an additional discount of 0.05% per annum to the extent that DDH LLC maintains a B Corp certification by Standards Analysts at the non-profit B Lab (or a successor certification or administrator). We expect that interest rates applicable to the 2021Credit 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 obligations under the 2021 Credit Facility are secured by senior liens on all or substantially all assets of DDH LLC and its subsidiaries and are guaranteed by the subsidiaries of DDH LLC. The 2021 Credit Facility is subject to an intercreditor agreement pursuant to which the lenders under the Revolving Credit Facility have a priority lien on the trade accounts receivable of DDH LLC and its subsidiaries that constitute eligible accounts under the Revolving Credit Facility and related proceeds, and the lenders under the 2021 Credit Facility have a priority lien on all other collateral. In connection with the entry into the 2021 Credit Facility, we paid off in full and terminated the 2020 Term Loan Facility. As of March 31, 2022, the Company owed a balance on the 2021 Credit Facility of $21,862,500. Financing costs incurred in the transaction were initially $2,127,185 in 2021 and additional fees of $180,480 for the three months ended March 31, 2022.  Unamortized deferred financing costs as of March 31, 2022 and December 31, 2021 were $2,153,821 and $2,091,732, respectively. Accrued and unpaid interest was $0 as of March 31, 2022 and December 31, 2021.

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

    

For the Three Months

 Ended 

March 31,

    

2022

    

2021

Interest expense – SilverPeak

$

$

508,503

Interest expense - Lafayette Square

 

487,500

 

Amortization of deferred financing costs -SilverPeak

 

 

71,685

Amortization of deferred financing costs – Lafayette Square

 

118,391

 

Total interest expense and amortization of deferred financing costs

$

605,891

$

580,188

U.S. Small Business Administration Loans

Economic Injury Disaster Loan

In 2020, the Company applied and was approved for a loan pursuant to the Economic Injury Disaster Loan (“EIDL”), administered by the U.S. Small Business Administration (“SBA”). The Company received the loan proceeds of $150,000 on June 15, 2020. The loan bears interest at a rate of 3.75% and matures on June 15, 2050. Installment payments, including principal and interest, of $731 will be payable monthly beginning June 15, 2022. Each payment will first be applied to pay accrued interest, then the remaining balance will be used to reduce principal. The loan is secured by substantially all assets of DDH LLC.

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

Paycheck Protection Program

In 2020, the Company applied and was approved for a loan pursuant to the Paycheck Protection Program (“PPP”), administered by the SBA (the “PPP-1 Loan”). The PPP was authorized in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and was designed to provide a direct financial incentive for qualifying business to keep their workforce employees. The SBA made PPP loans available to qualifying businesses in amounts up to 2.5 times their average monthly payroll expenses, and loans should be forgivable after a “covered period” (eight or twenty-four weeks) as long as the borrower maintains its payroll and utilities.

The forgiveness amount will be reduced if the borrower terminates employees or reduces salaries and wages more than 25% during the covered period. Any unforgiven portion is payable over two years if issued before, or five years if issued after, June 5, 2020 at an

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

DDH LLC received the PPP-1 Loan proceeds of $287,100 on May 8, 2020. On February 16, 2021, the remaining $10,000 balance of the PPP-1 Loan was forgiven. In March 2021, DDH LLC applied for and received another PPP loan (the “PPP-2 Loan”) for a principal amount of $287,143 and there are no collateral or guarantee requirements. Under the terms of the PPP-2 Loan, monthly payments of $6,440 are due starting June 11, 2022, and the loan bears interest at 1% per annum and matures on March 11, 2026.

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

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

2022

    

$

1,099,643

2023

 

 

1,100,000

2024

 

 

1,100,000

2025

 

 

1,100,473

2026

 

 

1,100,473

Thereafter

 

17,199,054

Total

 

22,699,643

Less current portion

 

(687,500)

Less deferred financing costs

 

(2,153,821)

Long-term debt, net

$

19,858,322

Note 6 — Mandatorily Redeemable Preferred Units

ASC 480, Distinguishing Liabilities from Equity, (“ASC 480”), defines mandatorily redeemable financial instruments as any financial instruments issued in the form of shares that have an unconditional obligation requiring the issuer to redeem the instrument by transferring its assets at a specified or determinable date (or dates) or upon an event that is certain to occur. A mandatorily redeemable financial instrument shall be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity. Under ASC 480, mandatorily redeemable financial instruments shall be measured initially at fair value.

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

Class A Preferred Units

In connection with the Orange142 acquisition, DDH LLC issued 3,500 non-voting Class A Preferred Units at a purchase price of $3,500,000, and a fair value of $3,458,378. Class A Preferred Units were entitled to certain approval rights and were mandatorily redeemable for $3,500,000 on September 30, 2022, with 10% preferred annual returns paid on a quarterly basis. Due to the mandatory redemption feature, ASC 480, requires that the Class A Preferred Units be classified as a liability rather than as a component of equity, with the preferred annual returns being accrued and recorded as interest expense.

In December 2021, DDH LLC redeemed the Class A Preferred Units and recognized a loss on the redemption of $41,622 in connection with the write-off of the fair value associated with the units. For the three months ended March 31, 2021, the Company recorded interest expense relating to the Class A Preferred Units of $86,301.

Class B Preferred Units

In connection with the Orange142 acquisition, DDH LLC issued 7,046 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.

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In February 2022, DDH LLC redeemed the Class B Preferred Units and recognized a loss on the redemption of $590,689 in connection with the write-off of the fair value associated with the units. For the three months ended March 31, 2022 and March 31, 2021, the Company recorded interest expense relating to the Class B Preferred Units of $62,162 and $121,620, respectively.

Note 7 — Related Party Transactions

Related Party Transactions

Member Payable

As of December 31, 2021, the Company had a net payable to members that totaled $70,801 pertaining to loans made to the Company by its founding members Walker and Smith during fiscal 2020. This remaining balance owed was paid to the members as of March 31, 2022.

Board Services and Consulting Agreement

On September 30, 2020, the Company entered into board services and consulting agreements with Walker, Smith and Leah Woolford (“Woolford”). Walker, Smith and Woolford were then all members of the Company. 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 31, 2022, total fees paid to Walker, Smith and Woolford were $56,250, $56,250 and $22,500, respectively. For the three months ended March 31, 2021, total fees paid to Walker, Smith and Woolford were $103,846, $103,846, and $45,000, respectively.

Note 8 — Commitments and Contingencies

Litigation

The Company may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. In management’s opinion, the outcome of any such litigation will not materially affect the Company’s financial condition. Nevertheless, due to uncertainties in the settlement process, it is at least reasonably possible that management’s view of the outcome could change materially in the near term.

Huddled Masses was named as a defendant in a lawsuit on July 10, 2019 related to a delinquent balance to a vendor. The matter is currently underway, and the Company has estimated a potential liability of approximately $500,000. Such liability has been recorded and included in accrued liabilities on the consolidated balance sheets as of March 31, 2022 and December 31, 2021. The Company entered into mediation discussions beginning April 2021.

Office Lease

In June 2019, the Company entered into a sublease for its corporate office headquarters at 1233 West Loop South, Ste 1170 in Houston, TX. The lease term expires July 1, 2022, and has a base monthly rent of approximately $3,600 per month.

In March 2022, the Company entered into a new lease to move its corporate headquarters to 1177 West Loop South, Ste 1170 in Houston, TX effective July 1, 2022. The lease is for 7,397 square feet of office space that expires February 28, 2030. The base monthly rent varies annually over the term of the lease. The Company paid a security deposit of approximately $29,000. The Company also leases office furniture for its corporate headquarters  under a lease agreement effective April 2019 and expiring July 2023. The monthly rent expense is approximately $6,700.

In March 2021, the Company extended its lease for office space at 716 Congress Ave, Ste 100 in Austin, Texas with an effective date of January 1, 2022. The lease expires December 31, 2023 and has a base rent of approximately $6,700 per month.

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

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

    

2022

Cash paid for amounts included in the measurement of lease liabilities

$

35,568

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

    

2022

Operating lease - right-of-use asset

$

917,877

Operating lease liabilities - current

$

209,914

Operating lease liabilities - long-term

 

708,262

Total lease liability

$

918,176

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

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

2022

    

$

116,956

2023

 

154,490

2024

 

110,215

2025

 

156,077

2026

 

159,754

Thereafter

 

530,324

Total lease payments

 

1,227,816

Less imputed interest

 

(309,640)

Total lease liability

$

918,176

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

Members’ Equity

Prior to the Organizational Transactions, DDH LLC was authorized to issue common units, Class A Preferred Units and Class B Preferred Units. In connection with the acquisition of Orange142, DDH LLC issued 5,637 common units, 3,500 Class A Preferred Units and 7,046 Class B Preferred Units. The common units were valued at $4,294,041 and Class A and Class B Preferred Units were valued at a total of $9,913,940. In December 2021, DDH LLC redeemed all of the Class A Preferred Units.

As of December 31, 2021, the total outstanding common units of DDH LLC was 34,182 units. The common units have voting rights, as well as certain redemption features at the option of the Company. In accordance with ASC 480, as of December 31, 2021, the Company classified the preferred units as a liability in the consolidated balance sheets.

Stockholders’ Equity – Initial Public Offering

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

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

On February 15, 2022, the Company completed its initial public offering of 2,800,000 units (“Units”), each consisting of (i) one share of our Class A common stock and (ii) one warrant entitling the holder to purchase one share of our Class A Common Stock at an exercise price of $5.50 per share. The warrants became immediately exercisable upon issuance and are exercisable for a period of five years after the issuance date. The shares of Class A Common Stock and warrants may be transferred separately immediately upon issuance. The underwriters, in our initial public offering, were granted a 45-day option to purchase up to an additional 420,000 shares and/or warrants, or any combination thereof, to cover over-allotments, which they initially exercised, in part, and elected to purchase warrants which have the same terms as those issued in the initial public offering, to purchase an additional 420,000 shares of Class A Common Stock. 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 did not exercise this option.

The Units were sold at a price of $5.50 per Unit, and the net proceeds from the offering were $10,192,793, after deducting underwriting discounts and commissions and offering expenses payable by the Company. The Company recorded offering expenses in accounts payable and accrued liabilities of $1,137,025 as of March 31, 2022 and intends to pay these amounts throughout the remainder of 2022. DDH LLC used the proceeds, together with pre-existing cash and cash equivalents, to purchase all of the remaining 5,637 common units and 7,046 Class B Preferred Units held indirectly by Woolford for an aggregate purchase price of $14,246,251, of which $10,284,089 was paid on the closing date of the initial public offering, and $3,962,162 was recorded in accrued liabilities in the consolidated balance sheets as of March 31, 2022. The Company intends to pay the remainder of the purchase price to the entity controlled by Woolford during the first half of 2022.

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

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

Weighted-

Weighted-average

average

Remaining

Aggregate

Exercise

Contractual Term

Intrinsic

    

Number of Shares

    

Price

    

(years)

    

Value

Outstanding at January 1, 2022

 

$

 

$

Warrants granted

 

3,220,000

$

5.50

 

4.88

 

Warrants exercised

 

$

 

 

Warrants canceled

 

$

 

 

Outstanding at March 31, 2022

 

3,220,000

$

5.50

 

4.88

$

Exercisable at March 31, 2022

 

3,220,000

$

5.50

 

4.88

$

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Note 10 — Loss Per Share / Unit

Basic loss per share / unit is calculated by dividing the net loss for the year by the weighted average number of share / unit outstanding during the period. The Company does not have any dilutive share / unit, and therefore the diluted weighted average number of share / unit outstanding are equal to the basic weighted average number of share / unit.

    

For the Three Months Ended 

March 31,

    

2022

    

2021

Net income loss per unit attributable to stockholders / members

$

(671,623)

$

(809,293)

Number of units outstanding at the beginning of the period

 

34,182

 

34,182

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

 

7,106,471

 

Weighted average units redeemed during the period

 

(34,182)

 

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

 

7,106,471

 

34,182

Net loss per shares / unit, basic and diluted

$

(0.09)

$

(23.68)

Note 11 — Employee Benefit Plans

The Company sponsors a safe harbor, defined contribution 401(k) and profit-sharing plan (the “Plan”) that allows eligible employees to contribute a percentage of their compensation. The Company matches employee contributions up to a maximum of 100% of the participant’s salary deferral, limited to 4% of the employee’s salary. For the three months ended March 31, 2022 and 2021, the Company matching contributions were $50,561 and $36,715, respectively. Additionally, the Company may make a discretionary profit- sharing contribution to the Plan. During the three months ended March 31, 2022 and 2021, no profit-sharing contributions were made.

The Company has an Employee Benefit Plan Trust (the “Trust”) to provide for the payment or reimbursement of all or a portion of covered medical, dental and prescription expenses. The Trust is funded with contributions made by the Company and participating employees at amounts sufficient to keep the Trust on an actuarially sound basis. The self-funded plan has an integrated stop loss insurance policy for the funding of the Trust benefits in excess of the full funding requirements. As of March 31, 2022 and December 31, 2021, the Company analyzed the incurred but not reported claims and records an estimated liability if needed.

Note 12 — 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:

    

For the Three Months

 Ended 

March 31,

    

2022

    

2021

Buy-side advertising

 

$

5,831,041

$

4,828,048

Sell-side advertising

 

5,539,296

 

865,686

Total revenues

$

11,370,337

$

5,693,734

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

For the Three Months

Ended

March 31,

    

2022

    

2021

Buy-side advertising

$

1,074,210

$

519,663

Sell-side advertising

 

651,042

 

(37,581)