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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 JUNE 30, 2023

OR

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

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER 001-41261

_________________________________________________________

DIRECT DIGITAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

_________________________________________________________

Delaware

    

87-2306185

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1177 West Loop South,

Suite 1310

Houston, Texas

77027

(Address of principal executive offices)

(Zip code)

(832) 402-1051

(Registrant’s telephone number, including area code)

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

Title of Each Class:

Trading symbol(s)

Name of Each Exchange on Which Registered:

Class A Common Stock, par value $0.001 per share

DRCT

NASDAQ

Warrants to Purchase Common Stock

DRCTW

NASDAQ

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

________________________________________________________

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

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

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

Large Accelerated Filer

   

Accelerated filer

    

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

As of August 9, 2023, there were 2,988,916 shares of the registrant’s Class A common stock outstanding, par value $0.001 per share, and 11,278,000 shares of the registrant’s Class B common stock outstanding, par value $0.001 per share.

Table of Contents

TABLE OF CONTENTS

   

 

 

PAGE

ITEM

Part I. Financial Information

3

1.

FINANCIAL STATEMENTS (UNAUDITED)

Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022

3

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022

4

Consolidated Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022

5

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022

6

Notes to Consolidated Financial Statements

7

2.

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

27

3.

Quantitative and Qualitative Disclosures About Market Risk

40

4.

Controls and Procedures

40

Part II. Other Information

41

1.

Legal Proceedings

41

1A.

Risk Factors

41

2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

3.

Defaults Upon Senior Securities

42

4.

Mine Safety Disclosures

42

5.

Other Information

42

6.

Exhibits

43

Signatures

44

2

Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

June 30, 2023

    

December 31, 2022

ASSETS

 

  

 

  

CURRENT ASSETS

 

  

 

  

Cash and cash equivalents

 

$

5,668,479

$

4,047,453

Accounts receivable, net

 

 

29,628,797

 

26,354,114

Prepaid expenses and other current assets

 

 

1,051,982

 

883,322

Total current assets

 

 

36,349,258

 

31,284,889

Property, equipment and software, net of accumulated depreciation and amortization of $155,698 and $34,218, respectively

688,716

673,218

Goodwill

 

6,519,636

 

6,519,636

Intangible assets, net

 

12,660,850

 

13,637,759

Deferred tax asset, net

5,170,870

5,164,776

Operating lease right-of-use assets

 

714,129

 

798,774

Other long-term assets

 

46,987

 

46,987

Total assets

$

62,150,446

$

58,126,039

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

CURRENT LIABILITIES

 

 

Accounts payable

$

23,357,665

$

17,695,404

Accrued liabilities

 

3,879,420

 

4,777,764

Liability related to tax receivable agreement, current portion

40,112

182,571

Notes payable, current portion

 

982,500

 

655,000

Deferred revenues

 

950,831

 

546,710

Operating lease liabilities, current portion

 

47,668

 

91,989

Income taxes payable

22,280

174,438

Related party payables

 

1,197,175

 

1,448,333

Total current liabilities

 

30,477,651

 

25,572,209

Notes payable, net of short-term portion and deferred financing cost of $1,858,720 and $2,115,161, respectively

 

22,515,030

 

22,913,589

Economic Injury Disaster Loan

 

150,000

 

150,000

Liability related to tax receivable agreement, net of current portion

4,246,263

4,149,619

Operating lease liabilities, net of current portion

 

741,771

 

745,340

Total liabilities

 

58,130,715

 

53,530,757

COMMITMENTS AND CONTINGENCIES (Note 9)

 

 

STOCKHOLDERS’ EQUITY

 

 

Class A common stock, $0.001 par value per share, 160,000,000 shares authorized, 3,519,780 and 3,252,764 shares issued and outstanding, respectively

 

3,520

 

3,253

Class B common stock, $0.001 par value per share, 20,000,000 shares authorized, 11,278,000 shares issued and outstanding

 

11,278

 

11,278

Additional paid-in capital

 

8,539,858

 

8,224,012

Accumulated deficit

 

(4,534,925)

 

(3,643,261)

Total stockholders’ equity

 

4,019,731

 

4,595,282

Total liabilities and stockholders’ equity

$

62,150,446

$

58,126,039

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

For the Six Months Ended

June 30, 

June 30, 

    

2023

    

2022

    

2023

    

2022

Revenues

 

  

 

  

Buy-side advertising

 

$

11,803,092

$

9,321,267

$

19,242,758

$

15,152,308

Sell-side advertising

 

 

23,600,708

 

11,940,041

37,383,952

17,479,337

Total revenues

 

 

35,403,800

 

21,261,308

56,626,710

32,631,645

Cost of revenues

 

 

 

Buy-side advertising

 

 

4,587,897

 

3,154,471

7,537,050

5,223,817

Sell-side advertising

 

 

20,743,266

 

9,771,017

32,583,972

14,291,209

Total cost of revenues

 

 

25,331,163

 

12,925,488

40,121,022

19,515,026

Gross profit

 

10,072,637

 

8,335,820

16,505,688

13,116,619

Operating expenses

 

 

Compensation, taxes and benefits

 

 

4,553,029

3,494,692

8,187,325

6,049,728

General and administrative

 

 

3,265,160

1,776,981

6,205,254

3,417,873

Total operating expenses

 

 

7,818,189

5,271,673

14,392,579

9,467,601

Income from operations

 

 

2,254,448

3,064,147

2,113,109

3,649,018

Other income (expense)

 

 

Other income

 

 

42,313

92,141

47,982

Forgiveness of Paycheck Protection Program loan

287,143

287,143

Loss on redemption of non-participating preferred units

 

 

(590,689)

Contingent loss on early termination of line of credit

 

 

(299,770)

Interest expense

 

(1,027,493)

 

(650,251)

(2,044,794)

(1,364,038)

Total other expense

 

(985,180)

 

(363,108)

(2,252,423)

(1,619,602)

Income (loss) before taxes

1,269,268

2,701,039

(139,314)

2,029,416

Tax expense (benefit)

 

74,312

 

86,676

(336)

86,676

Net income (loss)

$

1,194,956

$

2,614,363

$

(138,978)

$

1,942,740

Net income (loss) per common share:

 

 

Basic

$

0.08

$

0.18

$

(0.01)

$

0.18

Diluted

$

0.08

$

0.18

$

(0.01)

$

0.18

Weighted-average number of shares of common stock outstanding:

 

 

Basic

 

14,772,624

 

14,257,827

14,676,096

10,701,715

Diluted

14,834,051

14,257,827

14,676,096

10,701,715

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’ EQUITY

(Unaudited)

Six Months Ended June 30, 2023

Common Stock

    

    

    

    

Class A

Class B

Accumulated

Stockholders’

    

Units

    

Amount

    

Units

    

Amount

    

APIC

    

 deficit

    

equity

Balance, December 31, 2022

3,252,764

$

3,253

11,278,000

$

11,278

$

8,224,012

$

(3,643,261)

$

4,595,282

Stock-based compensation

304,013

304,013

Issuance of restricted stock net of shares withheld for vested awards

291,031

290

(290)

Restricted stock forfeitures

(26,215)

(25)

25

Warrants exercised

2,200

2

12,098

12,100

Distributions to members

 

 

 

 

 

 

(752,686)

 

(752,686)

Net loss

 

 

 

 

 

(138,978)

 

(138,978)

Balance, June 30, 2023

 

3,519,780

$

3,520

 

11,278,000

$

11,278

$

8,539,858

$

(4,534,925)

$

4,019,731

Three Months Ended June 30, 2023

    

Common Stock

    

    

    

    

Class A

Class B

Accumulated

Stockholders’

    

Units

    

Amount

    

Units

    

Amount

    

APIC

    

 deficit

    

equity

Balance, March 31, 2023

3,491,318

$

3,491

11,278,000

$

11,278

$

8,330,412

$

(4,977,195)

$

3,367,986

Stock-based compensation

209,475

209,475

Issuance of restricted stock net of shares withheld for vested awards

54,277

54

(54)

Restricted stock forfeitures

(25,815)

(25)

25

Distributions to members

 

 

 

 

 

 

(752,686)

 

(752,686)

Net income

 

 

 

 

 

 

1,194,956

 

1,194,956

Balance, June 30, 2023

 

3,519,780

$

3,520

 

11,278,000

$

11,278

$

8,539,858

$

(4,534,925)

$

4,019,731

Six Months Ended June 30, 2022

Common Stock

Members' /

Stockholders'

Common Units

Class A

Class B

Accumulated

equity

    

Units

    

Amount

    

Units

    

Amount

    

Units

    

Amount

    

APIC

    

 deficit

 (deficit)

Balance, December 31, 2021

 

34,182

$

4,294,241

 

$

 

$

$

$

(4,669,097)

$

(374,856)

Issuance of Class A common stock, net of transaction costs

 

 

 

2,800,000

 

2,800

 

 

 

10,164,243

 

 

10,167,043

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)

Stock-based compensation

15,407

15,407

Issuance of restricted stock

 

 

 

363,214

 

363

 

 

 

(363)

 

 

Distributions to members

 

 

 

 

 

 

 

 

(309,991)

 

(309,991)

Additional paid-in capital related to tax receivable agreement

 

 

 

 

 

 

485,100

 

 

485,100

Net income

 

 

 

 

 

 

 

 

1,942,740

 

1,942,740

Balance, June 30, 2022

 

$

 

3,163,214

$

3,163

 

11,378,000

$

11,378

$

7,747,250

$

(3,036,348)

$

4,725,443

Three Months Ended June 30, 2022

Common Stock

Class A

Class B

Accumulated

Stockholders'

    

Units

    

Amount

    

Units

    

Amount

    

APIC

    

 deficit

    

equity

Balance, March 31, 2022

    

2,800,000

$

2,800

11,378,000

$

11,378

$

7,272,856

$

(5,489,170)

$

1,797,864

Transaction costs associated with IPO

 

 

 

(25,750)

 

 

(25,750)

Stock-based compensation

 

 

 

15,407

 

 

15,407

Issuance of restricted stock

363,214

 

363

 

 

(363)

 

 

Distributions to members

 

 

 

 

(161,541)

 

(161,541)

Additional paid-in capital related to tax receivable agreement

 

 

 

485,100

 

 

485,100

Net income

 

 

 

 

2,614,363

 

2,614,363

Balance, June 30, 2022

3,163,214

$

3,163

11,378,000

$

11,378

$

7,747,250

$

(3,036,348)

$

4,725,443

See accompanying notes to the unaudited consolidated financial statements.

5

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DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

    

For the Six Months Ended June 30, 

    

2023

    

2022

Cash Flows Provided By Operating Activities:

  

  

Net income (loss)

 

$

(138,978)

$

1,942,740

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

 

Amortization of deferred financing costs

 

 

272,008

 

301,105

Amortization of intangible assets

976,909

976,909

Amortization of right-of-use assets

84,645

50,021

Amortization of capitalized software

104,005

Depreciation of property and equipment

17,475

Stock-based compensation

 

304,013

 

15,407

Forgiveness of Paycheck Protection Program loan

 

 

(287,143)

Deferred income taxes

(6,094)

38,966

Payment on tax receivable agreement

(45,815)

Loss on redemption of non-participating preferred units

 

 

590,689

Contingent loss on early termination of line of credit

299,770

Bad debt expense

 

51,532

24,799

Changes in operating assets and liabilities:

Accounts receivable

 

 

(3,326,215)

(6,996,667)

Prepaid expenses and other assets

 

 

(256,496)

386,258

Accounts payable

 

 

5,662,261

3,406,355

Accrued liabilities

 

 

(769,344)

601,699

Income taxes payable

(152,158)

47,710

Deferred revenues

 

 

404,121

(905,111)

Operating lease liability

(47,890)

(49,422)

Related party payable

 

 

(251,158)

(70,801)

Net cash provided by operating activities

 

 

3,182,591

73,514

Cash Flows Used In Investing Activities:

Cash paid for capitalized software and property and equipment

(136,978)

Net cash used in investing activities

(136,978)

Cash Flows Provided by (Used In) Financing Activities:

 

 

Payments on term loan

 

 

(327,500)

(275,000)

Payments of litigation settlement

(129,000)

Payment of deferred financing costs

 

 

(227,501)

(185,093)

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

 

 

11,212,043

Redemption of common units

 

 

(3,237,838)

Redemption of non-participating preferred units

(7,046,251)

Proceeds from warrants exercised

 

 

12,100

Distributions to members

 

 

(752,686)

(309,991)

Net cash provided by (used in) financing activities

(1,424,587)

157,870

Net increase in cash and cash equivalents

 

 

1,621,026

231,384

Cash and cash equivalents, beginning of the period

 

4,047,453

 

4,684,431

Cash and cash equivalents, end of the period

$

5,668,479

$

4,915,815

Supplemental Disclosure of Cash Flow Information:

 

 

  

Cash paid for taxes

$

348,862

$

Cash paid for interest

$

1,769,452

$

1,058,548

Non-cash Financing Activities:

 

 

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

$

$

1,045,000

Common unit redemption balance included in accrued liabilities

$

$

3,962,162

Outside basis difference in partnership

$

$

3,234,000

Tax receivable agreement payable to Direct Digital Management, LLC

$

$

2,748,900

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., incorporated as a Delaware corporation on August 23, 2021 and headquartered in Houston, Texas, together with its subsidiaries, operates an end-to-end, full-service programmatic advertising platform primarily focused on providing advertising technology, data-driven campaign optimization and other solutions to underserved and less efficient markets on both the buy- and sell-side of the digital advertising ecosystem. Direct Digital Holdings, Inc. is the holding company for Direct Digital Holdings, LLC (“DDH LLC”), which is, in turn, the holding company for the business formed by DDH LLC’s founders in 2018 through the acquisition of Huddled Masses, LLC (“Huddled MassesTM” or “Huddled Masses”) and Colossus Media, LLC (“Colossus Media”). Colossus Media operates our proprietary sell-side programmatic platform operating under the trademarked banner of Colossus SSPTM (“Colossus SSP”). In late September 2020, DDH LLC acquired Orange142, LLC (“Orange142”) to further bolster its overall programmatic buy-side advertising platform and to enhance its offerings across multiple industry verticals such as travel, healthcare, education, financial services, consumer products and other sectors with particular emphasis on small and mid-sized businesses transitioning into digital with growing digital media budgets. In February 2022, Direct Digital Holdings, Inc. completed an initial public offering of its securities and, together with DDH LLC, effected a series of transactions (together, the “Organizational Transactions”) whereby Direct Digital Holdings, Inc. became the sole managing member of DDH LLC, the holder of 100% of the voting interests of DDH LLC and the holder of 19.7% of the economic interests of DDH LLC, commonly referred to as an “Up-C” structure. (See Note 8 – Related Party Transactions). In these financial statements, the “Company,” “Direct Digital,” “Direct Digital Holdings,” “DDH,” “we,” “us” and “our” refer (i) following the completion of the Organizational Transactions, including the initial public offering, to Direct Digital Holdings, Inc., and, unless otherwise stated, all of its subsidiaries, including DDH LLC, and, unless otherwise stated, its subsidiaries, and (ii) on or prior to the completion of the Organizational Transactions, to DDH LLC and, unless otherwise stated, its subsidiaries. All of the subsidiaries are incorporated in the state of Delaware, except for DDH LLC, which was formed under the laws of the State of Texas.

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

    

    

Advertising 

    

    

Solution 

Date

Current %

and 

of

Subsidiary

    

 Ownership

    

Segment

    

Date of Formation

    

Acquisition

Direct Digital Holdings, LLC

 

100.0

%  

N/A

June 21, 2018

August 26, 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 LGBTQIA+ customers, as well as other specific audiences.

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

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

Basis of presentation

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

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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 June 30, 2023, $5,668,479 of the Company’s cash and cash equivalents exceeded the federally insured limits, none of which is held at Silicon Valley Bank (“SVB”). 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 June 30, 2023 and December 31, 2022, the Company’s allowance for doubtful accounts

8

Table of Contents

was $25,754 and $4,323, respectively. Management periodically reviews outstanding accounts receivable for reasonableness. If warranted, the Company processes a claim with the third-party insurance company to recover uncollected balances, rather than writing the balances off to bad debt expense. The guaranteed recovery for the claim is approximately 90% of the original balance, and if the full amount is collected by the insurance company, the remaining 10% is remitted to the Company. If the insurance company is unable to collect the full amount, the Company records the remaining 10% to bad debt expense. Bad debt expense was $51,652 and $27,224 for the three months ended June 30, 2023 and 2022, respectively, and $51,532 and $24,799 for the six months ended June 30, 2023 and 2022, respectively.  

Concentration of customers

There is an inherent concentration of credit risk associated with accounts receivable arising from revenue from major customers on both the buy-side and sell-side of the business.  For the three months ended June 30, 2023 and 2022, one customer represented 63% and 56% of revenues, respectively, and a second customer represented 10% and 0% of revenues, respectively.  For the six months ended June 30, 2023 and 2022, one customer represented 62% and 53% of revenues, respectively, and a second customer represented 1% and 11% of revenues, respectively. As of June 30, 2023 and December 31, 2023, one customer accounted for 75% and 80%, respectively, of accounts receivable.

Property and equipment, net

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

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

Internal Use of Software Development Costs (Capitalized Software)

The Company capitalizes costs related to the development of internal-use software.  Costs incurred during the application development phase are capitalized and amortized using the straight-line method over the estimated useful life.

Goodwill

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

As of June 30, 2023, goodwill was $6,519,636, which includes $2,423,936 as a result of the acquisition of Huddled Masses and Colossus Media in 2018 and $4,095,700 of goodwill recognized from the acquisition of Orange142 in September 2020.

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 June 30, 2023 and December 31, 2022, there were no events or changes in circumstances to indicate that the carrying amount of the assets may not be recoverable.

Fair value measurements

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

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

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

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

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

Deferred financing costs

The Company records costs related to its line of credit and the issuance of debt obligations as deferred financing costs. These costs are deferred and amortized to interest expense using the straight-line method over the life of the debt. In December 2021, the Company amended its line of credit with East West Bank (see Note 6 – Long-Term Debt) and incurred additional deferred financing costs of $4,613 during the six months ended June 30, 2022.  On July 26, 2022, the Company repaid the line of credit and terminated the Revolving Credit Facility as of such date and the remaining deferred financing costs of $33,434 were amortized to interest expense during the year ended December 31, 2022. There were no unamortized deferred financing costs related to the line of credit as of June 30, 2023 and December 31, 2022.

In January 2023, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (the “SVB Loan Agreement”) and incurred $211,934 of deferred financing costs during the six months ended June 30, 2023.  As the Company had not yet drawn any amounts on the agreement, on March 13, 2023 the Company issued a notice of termination and expensed the deferred financing costs which totaled $299,770 to contingent loss on early termination of line of credit during the six months ended June 30, 2023.  Termination of the facility with Silicon Valley Bank (“SVB”) became effective April 20, 2023.