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 SEPTEMBER 30, 2022


☐	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		83-0662116
(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 November 11, 2022, there were 3,260,364 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.

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TABLE OF CONTENTS



		PAGE
ITEM

	Part I. Financial Information	3

1.	FINANCIAL STATEMENTS (UNAUDITED)
	Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021	4
	Consolidated Changes in Stockholders’ / Members’ Equity (Deficit) for the Three and Nine Months Ended September 30, 2022 and 2021	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021	7
	Notes to Consolidated Financial Statements	8

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

3.	Quantitative and Qualitative Disclosures About Market Risk	40

4.	Controls and Procedures	40

	Part II. Other Information	40

1.	Legal Proceedings	40

1A.	Risk Factors	41

2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

3.	Defaults Upon Senior Securities	41

4.	Mine Safety Disclosures	41

5.	Other Information	41

6.	Exhibits	42

Signatures		44

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PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2022		December 31, 2021

ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	7,010,796	$	4,684,431
Accounts receivable, net		21,388,531		7,871,181
Prepaid expenses and other current assets		696,486		1,225,447
Total current assets		29,095,813		13,781,059

Goodwill		6,519,636		6,519,636
Intangible assets, net (Note 3)		14,126,214		15,591,578
Deferred tax asset, net (Note 12)		3,160,054		—
Deferred financing costs, net		—		96,152
Operating lease right-of-use assets		840,505		—
Other long-term assets		58,279		11,508
Total assets	$	53,800,501	$	35,999,933

LIABILITIES AND STOCKHOLDERS’ / MEMBERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable	$	16,718,342	$	6,710,015
Accrued liabilities		3,599,944		1,044,907
Current portion of liability related to tax receivable agreement		183,260		—
Notes payable, current portion		655,000		550,000
Deferred revenues		1,146,186		1,348,093
Operating lease liabilities, current portion		92,473		—
Income taxes payable		94,440		—
Related party payables (Note 7)		—		70,801
Total current liabilities		22,489,645		9,723,816

Notes payable, net of short-term portion and deferred financing cost of $2,250,171 and $2,091,732, respectively		22,942,329		19,358,268
Mandatorily redeemable non-participating preferred units		—		6,455,562
Line of credit		—		400,000
Paycheck Protection Program loan		—		287,143
Economic Injury Disaster Loan		150,000		150,000
Liability related to tax receivable agreement, net of current portion		2,451,103		—
Operating lease liabilities, net of current portion		767,610		—
Total liabilities		48,800,687		36,374,789

COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS’ / MEMBERS' EQUITY (DEFICIT)
Units, 1,000,000 units authorized at December 31, 2021; 34,182 units issued and outstanding as of December 31, 2021		—		4,294,241
Class A common stock, $0.001 par value per share, 160,000,000 shares authorized, 3,260,364 shares issued and outstanding as of September 30, 2022		3,260		—
Class B common stock, $0.001 par value per share, 20,000,000 shares authorized, 11,278,000 shares issued and outstanding as of September 30, 2022		11,278		—
Additional paid-in capital		7,817,283		—
Accumulated deficit		(2,832,007)		(4,669,097)
Total stockholders’ / members' equity (deficit)		4,999,814		(374,856)
Total liabilities and stockholders’ / members' equity (deficit)	$	53,800,501	$	35,999,933

See accompanying notes to the unaudited consolidated financial statements.

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DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Revenues
Buy-side advertising	$	7,130,736	$	6,033,883	$	22,283,044	$	19,975,235
Sell-side advertising		18,854,639		2,326,862		36,333,976		5,261,135
Total revenues		25,985,375		8,360,745		58,617,020		25,236,370

Cost of revenues
Buy-side advertising		2,471,170		2,174,432		7,694,987		7,480,727
Sell-side advertising		16,053,461		1,951,350		30,344,670		4,348,756
Total cost of revenues		18,524,631		4,125,782		38,039,657		11,829,483
Gross profit		7,460,744		4,234,963		20,577,363		13,406,887

Operating expenses
Compensation, taxes and benefits		3,845,918		2,235,066		9,895,646		6,131,930
General and administrative		1,770,002		1,432,985		5,187,875		4,214,229
Total operating expenses		5,615,920		3,668,051		15,083,521		10,346,159
Income from operations		1,844,824		566,912		5,493,842		3,060,728

Other income (expense)
Other income		—		—		47,982		19,186
Forgiveness of Paycheck Protection Program loan		—		—		287,143		10,000
Gain from revaluation and settlement of seller notes and earnout liability		—		—		—		21,232
Loss on redemption of non-participating preferred units		—		—		(590,689)		—
Interest expense		(905,605)		(792,400)		(2,269,643)		(2,432,567)
Total other expense		(905,605)		(792,400)		(2,525,207)		(2,382,149)

Income before taxes		939,219		(225,488)		2,968,635		678,579
Tax expense		128,436		878		215,112		54,878
Net income (loss)	$	810,783	$	(226,366)	$	2,753,523	$	623,701

Net income (loss) per common share / unit:
Basic and Diluted	$	0.06	$	(6.62)	$	0.23	$	18.25

Weighted-average number of shares of common stock / units outstanding:
Basic and Diluted		14,545,241		34,182		11,996,969		34,182

See accompanying notes to the unaudited consolidated financial statements.

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DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

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

(Unaudited)

Nine Months Ended September 30, 2022


														Members' /
				Common Stock								Accumulated		Stockholders’
	Common Units			Class A			Class B					equity		equity
	Units	Amount		Units	Amount		Units	Amount		APIC		(deficit)		(deficit)
Balance, December 31, 2021	34,182	$	4,294,241	—	$	—	—	$	—	$	—	$	(4,669,097)	$	(374,856)
Issuance of Class A common stock, net of transaction costs	—		—	2,800,000		2,800	—		—		10,164,243		—		10,167,043
Conversion of member units to Class B shares	(28,545)		(200)	—		—	11,378,000		11,378		(11,178)		—		—
Conversion of Class B shares to Class A common stock	—		—	100,000		100	(100,000)		(100)		—		—		—
Redemption of common units	(5,637)		(4,294,041)	—		—	—		—		(2,905,959)		—		(7,200,000)
Stock-based compensation	—		—	—		—	—		—		85,437		—		85,437
Issuance of restricted stock	—		—	374,914		375	—		—		(375)		—		—
Restricted stock forfeitures	—		—	(14,550)		(15)	—		—		15		—		—
Distributions to members	—		—	—		—	—		—		—		(916,433)		(916,433)
Additional paid-in capital related to tax receivable agreement	—		—	—		—	—		—		485,100		—		485,100
Net income	—		—	—		—	—		—		—		2,753,523		2,753,523
Balance, September 30, 2022	—	$	—	3,260,364	$	3,260	11,278,000	$	11,278	$	7,817,283	$	(2,832,007)	$	4,999,814

Three Months Ended September 30, 2022


				Common Stock										Members' /
												Accumulated			Stockholders’
	Common Units			Class A			Class B					equity		equity
	Units		Amount	Units		Amount	Units		Amount		APIC	(deficit)		(deficit)
Balance, June 30, 2022	—	$	—	3,163,214	$	3,163	11,378,000	$	11,378	$	7,747,250	$	(3,036,348)	$	4,725,443
Conversion of Class B shares to Class A common stock	—		—	100,000		100	(100,000)		(100)		—		—		—
Stock-based compensation	—		—	—		—	—		—		70,030		—		70,030
Issuance of restricted stock	—		—	11,700		12	—		—		(12)		—		—
Restricted stock forfeitures	—		—	(14,550)		(15)	—		—		15		—		—
Distributions to members	—		—	—		—	—		—		—		(606,442)		(606,442)
Net income	—		—	—		—	—		—		—		810,783		810,783
Balance, September 30, 2022	—	$	—	3,260,364	$	3,260	11,278,000	$	11,278	$	7,817,283	$	(2,832,007)	$	4,999,814

See accompanying notes to the unaudited consolidated financial statements.

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DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

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

(Unaudited)

Nine Months Ended September 30, 2021


				Common Stock								Accumulated		Members' /
	Common Units			Class A			Class B					equity		equity
	Units	Amount		Units	Amount		Units	Amount		APIC		(deficit)		(deficit)
Balance, December 31, 2020	34,182	$	4,294,241	—	$	—	—	$	—	$	—	$	(1,925,951)	$	2,368,290
Distributions to members	—		—	—		—	—		—		—		(924,695)		(924,695)
Net income	—		—	—		—	—		—		—		623,701		623,701
Balance, September 30, 2021	34,182	$	4,294,241	—	$	—	—	$	—	$	—	$	(2,226,945)	$	2,067,296

Three Months Ended September 30, 2021


														Members' /
				Common Units								Accumulated		Stockholders'
	Common Stock			Class A			Class B					equity		equity
	Units	Amount		Units	Amount		Units	Amount		APIC		(deficit)		(deficit)
Balance, June 30, 2021	34,182	$	4,294,241	—	$	—	—	$	—	$	—	$	(1,728,453)	$	2,565,788
Distributions to members	—		—	—		—	—		—		—		(272,126)		(272,126)
Net loss	—		—	—		—	—		—		—		(226,366)		(226,366)
Balance, September 30, 2021	34,182	$	4,294,241	—	$	—	—	$	—	$	—	$	(2,226,945)	$	2,067,296

See accompanying notes to the unaudited consolidated financial statements.

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DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Nine Months Ended September 30,
	2022		2021
Cash Flows Provided By Operating Activities:
Net income	$	2,753,523	$	623,701
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of deferred financing costs		463,008		253,887
Amortization of intangible assets		1,465,364		1,465,364
Amortization of right-of-use assets		94,974		—
Stock-based compensation		85,437		—
Forgiveness of Paycheck Protection Program loan		(287,143)		(10,000)
Paid-in-kind interest		—		269,260
Deferred income taxes		(40,591)		—
Gain from revaluation and settlement of earnout liability		—		(21,232)
Loss on redemption of non-participating preferred units		590,689		—
Bad debt expense		2,717		67,541
Changes in operating assets and liabilities:
Accounts receivable		(13,520,067)		708,025
Prepaid expenses and other assets		482,190		(491,560)
Accounts payable		10,008,327		(153,045)
Accrued liabilities		1,555,037		118,043
Income taxes payable		94,440		—
Deferred revenues		(201,907)		375,621
Operating lease liability		(75,396)		—
Related party payable		(70,801)		(964)
Net cash provided by operating activities		3,399,801		3,204,641

Cash Flows Used In Financing Activities:
Proceeds from note payable		4,260,000		—
Payments on term loan		(412,500)		(1,206,750)
Payments on lines of credit		(400,000)		—
Payment of deferred financing costs		(525,295)		—
Proceeds from Paycheck Protection Program loan		—		287,143
Proceeds from Issuance of Class A common stock, net of transaction costs		11,167,043		—
Redemption of common units		(7,200,000)		—
Redemption of non-participating preferred units		(7,046,251)		—
Payments on seller notes and earnouts payable		—		(369,185)
Distributions to members		(916,433)		(924,695)
Net cash used in financing activities		(1,073,436)		(2,213,487)

Net increase in cash and cash equivalents		2,326,365		991,154
Cash and cash equivalents, beginning of the period		4,684,431		1,611,998
Cash and cash equivalents, end of the period	$	7,010,796	$	2,603,152

Supplemental Disclosure of Cash Flow Information:
Cash paid for taxes	$	133,401	$	14,878
Cash paid for interest	$	1,744,365	$	3,111,628

Non-cash Financing Activities:
Transaction costs related to issuances of Class A shares included in accrued liabilities	$	1,000,000	$	—
Outside basis difference in partnership	$	3,234,000	$	—
Tax receivable agreement payable to Direct Digital Management, LLC	$	278,900	$	—
Tax benefit on tax receivable agreement	$	485,100	$	—

See accompanying notes to the unaudited consolidated financial statements.

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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^TM” or “Huddled Masses”) and Colossus Media, LLC (“Colossus Media”). Colossus Media operates our proprietary sell-side programmatic platform operating under the trademarked banner of Colossus SSP^TM (“Colossus SSP”). In late September 2020, DDH LLC acquired Orange142, LLC (“Orange142”) to further bolster its overall programmatic buy-side advertising platform and to enhance its offerings across multiple industry verticals such as travel, healthcare, education, financial services, consumer products and other sectors with particular emphasis on small and mid-sized businesses transitioning into digital with growing digital media budgets. In February 2022, Direct Digital Holdings, Inc. completed an initial public offering of its securities and, together with DDH LLC, effected a series of transactions (together, the “Organizational Transactions”) whereby Direct Digital Holdings, Inc. became the sole managing member of DDH LLC, the holder of 100% of the voting interests of DDH LLC and the holder of 19.7% of the economic interests of DDH LLC, commonly referred to as an “Up-C” structure. (See Note 7 – Related Party Transactions). In these financial statements, the “Company,” “Direct Digital,” “Direct Digital Holdings,” “DDH,” “we,” “us” and “our” refer (i) following the completion of the Organizational Transactions, including the initial public offering, to Direct Digital Holdings, Inc., and, unless otherwise stated, all of its subsidiaries, including DDH LLC, and, unless otherwise stated, its subsidiaries, and (ii) on or prior to the completion of the Organizational Transactions, to DDH LLC and, unless otherwise stated, its subsidiaries. All of the subsidiaries are incorporated in the state of Delaware, except for DDH LLC, which was formed under the laws of the State of Texas.

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


			Advertising
			Solution		Date
	Current %		and		Of
Subsidiary	Ownership		Segment	Date of Formation	Acquisition
Direct Digital Holdings, LLC	100.0	%	N/A	June 21, 2018	August 26, 2018
Huddled Masses, LLC	100.0	%	Buy-side	November 13, 2012	June 21, 2018
Colossus Media, LLC	100.0	%	Sell-side	September 8, 2017	June 21, 2018
Orange142, LLC	100.0	%	Buy-side	March 6, 2013	September 30, 2020

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

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

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

Basis of presentation

The Company’s consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect the financial position, results of operations and cash flows for all periods presented. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 29, 2022. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the results for the periods presented.

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

Basis of consolidation

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

Business combinations

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

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

Use of estimates

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

Cash and cash equivalents

Cash and cash equivalents consist of funds deposited with financial institutions and highly liquid instruments with original maturities of three months or less. Such deposits may, at times, exceed federally insured limits. As of September 30, 2022, $5,487,110 of the Company’s cash and cash equivalents exceeded the federally insured limits. The Company has not experienced any losses in such amounts and believes it is not exposed to any significant credit risk to cash.

Accounts receivable

Accounts receivable primarily consists of billed amounts for products and services rendered to customers under normal trade terms. The Company performs credit evaluations of its customers’ financial condition and generally does not require collateral. Accounts receivables are stated at net realizable value. The Company began insuring its accounts receivable with unrelated third-party insurance companies in an effort to mitigate any future write-offs and establishes an allowance for doubtful accounts as deemed necessary for accounts not covered by this insurance. As of September 30, 2022 and December 31, 2021, the Company’s allowance for doubtful

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accounts was $3,489 and $40,856, respectively. Management periodically reviews outstanding accounts receivable for reasonableness. If warranted, the Company processes a claim with the third-party insurance company to recover uncollected balances, rather than writing the balances off to bad debt expense. The guaranteed recovery for the claim is approximately 90% of the original balance, and if the full amount is collected by the insurance company, the remaining 10% is remitted to the Company. If the insurance company is unable to collect the full amount, the Company records the remaining 10% to bad debt expense. For the three months ended September 30, 2022, we recovered $22,082 on receivables previously written off. Bad debt expense was $35,724 for the three months ended September 30, 2021. Bad debt expense was $2,717 and $67,541 for the nine months ended September 30, 2022 and 2021, respectively.

Concentrations of credit risk

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


	September 30,		December 31,
	2022		2021
Customer A	85.0	%	62.9	%
Customer B	0.2	%	5.2	%

Property and equipment, net

Property and equipment are recognized in the consolidated balance sheets at cost less accumulated depreciation and amortization. The Company capitalizes purchases and depreciates its property and equipment using the straight-line method of depreciation over the estimated useful lives of the respective assets, generally ranging from three to five years. Leasehold improvements are amortized over the shorter of their useful lives or the remaining terms of the related leases. As of September 30, 2022 and December 31, 2021, the Company has fully depreciated all property and equipment.

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

Goodwill

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

As of September 30, 2022, goodwill was $6,519,636, which includes $2,423,936 as a result of the acquisition of Huddled Masses and Colossus Media in 2018 and $4,095,700 of goodwill recognized from the acquisition of Orange142 in September 2020.

Intangible assets, net

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

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Impairment of long-lived assets

The Company evaluates long-lived assets, including property and equipment, and acquired intangible assets consisting of customer relationships, trademarks and trade names, and non-compete agreements, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is assessed based on the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds its estimated fair value and is recognized as a reduction in the carrying amount of the asset. As of September 30, 2022 and December 31, 2021, there were no events or changes in circumstances to indicate that the carrying amount of the assets may not be recoverable.

Fair value measurements

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

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

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

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

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

Deferred financing costs

The Company records costs related to its line of credit and the issuance of debt obligations as deferred financing costs. These costs are deferred and amortized to interest expense using the straight-line method over the life of the debt. In December 2021, the Company amended its line of credit with East West Bank (see Note 5 – Long-Term Debt) and incurred additional deferred financing costs of $4,613 during the nine months ended September 30, 2022. On July 26, 2022, the Company repaid the line of credit and terminated the Revolving Credit Facility as of such date and the remaining deferred financing costs of $33,434 were amortized to interest expense during the three months ended September 30, 2022. Unamortized deferred financing costs related to the line of credit was $0 and $96,152 as of September 30, 2022 and December 31, 2021, respectively, and due to the revolving nature of this debt, was classified as an asset on the consolidated balance sheets.

In December 2021, the Company entered into an agreement with Lafayette Square Loan Servicing, LLC (“Lafayette Square”) (see Note 5 – Long-Term Debt) and incurred additional deferred financing costs of $520,682 during the nine months ended September 30, 2022. Unamortized deferred financing costs was $2,250,171 and $2,091,732 as of September 30, 2022 and December 31, 2021, respectively, and netted against the outstanding debt on the consolidated balance sheets.

Right-of-use assets

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

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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:

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Identification of a contract(s) with a customer;

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Identification of the performance obligation(s) in the contract;

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Determination of the transaction price;

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Allocation of the transaction price to the performance obligation(s) in the contract; and

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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.