10-Q 1 tmb-20230930x10q.htm 10-Q
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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, 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

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 7, 2023, there were 2,992,425 shares of the registrant’s Class A common stock outstanding, par value $0.001 per share, and 11,278,000 shares of the registrant’s Class B common stock outstanding, par value $0.001 per share.

TABLE OF CONTENTS

   

 

 

PAGE

ITEM

Part I. Financial Information

3

1.

FINANCIAL STATEMENTS (UNAUDITED)

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

3

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022

4

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

5

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022

6

Notes to Consolidated Financial Statements

7

2.

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

28

3.

Quantitative and Qualitative Disclosures About Market Risk

41

4.

Controls and Procedures

42

Part II. Other Information

43

1.

Legal Proceedings

43

1A.

Risk Factors

43

2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

3.

Defaults Upon Senior Securities

43

4.

Mine Safety Disclosures

43

5.

Other Information

44

6.

Exhibits

45

Signatures

46

2

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

September 30, 2023

    

December 31, 2022

ASSETS

 

  

 

  

CURRENT ASSETS

 

  

 

  

Cash and cash equivalents

 

$

5,481,949

$

4,047,453

Accounts receivable, net

 

 

54,637,634

 

26,354,114

Prepaid expenses and other current assets

 

 

1,426,925

 

883,322

Total current assets

 

 

61,546,508

 

31,284,889

Property, equipment and software, net of accumulated depreciation and amortization of $219,386 and $34,218, respectively

625,028

673,218

Goodwill

 

6,519,636

 

6,519,636

Intangible assets, net

 

12,172,396

 

13,637,759

Deferred tax asset, net

5,082,424

5,164,776

Operating lease right-of-use assets

 

674,846

 

798,774

Other long-term assets

 

127,492

 

46,987

Total assets

$

86,748,330

$

58,126,039

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

CURRENT LIABILITIES

 

 

Accounts payable

$

45,021,034

$

17,695,404

Accrued liabilities

 

4,071,128

 

4,777,764

Liability related to tax receivable agreement, current portion

41,141

182,571

Notes payable, current portion

 

1,146,250

 

655,000

Deferred revenues

 

1,044,069

 

546,710

Operating lease liabilities, current portion

 

49,977

 

91,989

Income taxes payable

113,355

174,438

Related party payables

 

1,428,093

 

1,448,333

Total current liabilities

 

52,915,047

 

25,572,209

Notes payable, net of short-term portion and deferred financing cost of $1,722,716 and $2,115,161, respectively

 

22,323,534

 

22,913,589

Economic Injury Disaster Loan

 

150,000

 

150,000

Liability related to tax receivable agreement, net of current portion

4,245,234

4,149,619

Operating lease liabilities, net of current portion

 

717,632

 

745,340

Total liabilities

 

80,351,447

 

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, 2,991,792 and 2,900,000 shares issued and outstanding, respectively

 

2,992

 

2,900

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

 

8,782,092

 

8,224,365

Accumulated deficit

 

(2,399,479)

 

(3,643,261)

Total stockholders’ equity

 

6,396,883

 

4,595,282

Total liabilities and stockholders’ equity

$

86,748,330

$

58,126,039

See accompanying notes to the unaudited consolidated financial statements.

3

DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

    

For the Three Months Ended

For the Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Revenues

 

  

 

  

Buy-side advertising

 

$

7,850,058

$

7,130,736

$

27,092,816

$

22,283,044

Sell-side advertising

 

 

51,622,066

 

18,854,639

89,006,018

36,333,976

Total revenues

 

 

59,472,124

 

25,985,375

116,098,834

58,617,020

Cost of revenues

 

 

 

Buy-side advertising

 

 

3,113,491

 

2,471,170

10,650,541

7,694,987

Sell-side advertising

 

 

44,605,815

 

16,053,461

77,189,787

30,344,670

Total cost of revenues

 

 

47,719,306

 

18,524,631

87,840,328

38,039,657

Gross profit

 

11,752,818

 

7,460,744

28,258,506

20,577,363

Operating expenses

 

 

Compensation, taxes and benefits

 

 

4,747,081

3,845,918

12,934,406

9,895,646

General and administrative

 

 

2,512,330

1,770,002

8,717,584

5,187,875

Total operating expenses

 

 

7,259,411

5,615,920

21,651,990

15,083,521

Income from operations

 

 

4,493,407

1,844,824

6,606,516

5,493,842

Other income (expense)

 

 

Other income

 

 

83,331

175,472

47,982

Forgiveness of Paycheck Protection Program loan

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

 

(1,059,890)

 

(905,605)

(3,104,684)

(2,269,643)

Total other expense

 

(976,559)

 

(905,605)

(3,228,982)

(2,525,207)

Income before taxes

3,516,848

939,219

3,377,534

2,968,635

Tax expense

 

165,994

 

128,436

165,658

215,112

Net income

$

3,350,854

$

810,783

$

3,211,876

$

2,753,523

Net income per common share:

 

 

Basic

$

0.23

$

0.06

$

0.23

$

0.23

Diluted

$

0.23

$

0.06

$

0.22

$

0.23

Weighted-average number of shares of common stock outstanding:

 

 

Basic

 

14,268,168

 

14,178,000

14,216,211

11,846,601

Diluted

14,827,165

14,545,241

14,817,770

11,996,969

See accompanying notes to the unaudited consolidated financial statements.

4

DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

Nine Months Ended September 30, 2023

Common Stock

    

    

    

    

Class A

Class B

Accumulated

Stockholders’

    

Units

    

Amount

    

Units

    

Amount

    

APIC

    

 deficit

    

equity

Balance, December 31, 2022

2,900,000

$

2,900

11,278,000

$

11,278

$

8,224,365

$

(3,643,261)

$

4,595,282

Stock-based compensation

545,504

545,504

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

89,459

90

(90)

Warrants exercised

2,200

2

12,098

12,100

Stock options exercised

133

 

 

 

 

215

 

215

Distributions to members

 

 

 

 

 

 

(1,968,094)

 

(1,968,094)

Net income

 

 

 

 

 

3,211,876

 

3,211,876

Balance, September 30, 2023

 

2,991,792

$

2,992

 

11,278,000

$

11,278

$

8,782,092

$

(2,399,479)

$

6,396,883

Three Months Ended September 30, 2023

    

Common Stock

    

    

    

    

Class A

Class B

Accumulated

Stockholders’

    

Units

    

Amount

    

Units

    

Amount

    

APIC

    

 deficit

    

equity

Balance, June 30, 2023

2,988,916

$

2,989

11,278,000

$

11,278

$

8,540,389

$

(4,534,925)

$

4,019,731

Stock-based compensation

241,491

241,491

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

2,743

3

(3)

Stock options exercised

133

215

215

Distributions to members

 

 

 

 

 

 

(1,215,408)

 

(1,215,408)

Net income

 

 

 

 

 

 

3,350,854

 

3,350,854

Balance, September 30, 2023

 

2,991,792

$

2,992

 

11,278,000

$

11,278

$

8,782,092

$

(2,399,479)

$

6,396,883

Nine Months Ended September 30, 2022

Common Stock

Members' /

Common Units

Class A

Class B

Accumulated

Stockholders'

Units

Amount

Units

Amount

Units

Amount

APIC

 deficit

equity

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

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

$

2,900,000

$

2,900

11,278,000

$

11,278

$

7,817,643

$

(2,832,007)

$

4,999,814

Three Months Ended September 30, 2022

Common Stock

Class A

Class B

Accumulated

Stockholders'

    

Units

    

Amount

    

Units

    

Amount

    

APIC

    

 deficit

    

equity

Balance, June 30, 2022

    

2,800,000

$

2,800

11,378,000

$

11,378

$

7,747,613

$

(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

Distributions to members

 

 

 

 

(606,442)

 

(606,442)

Net income

 

 

 

 

810,783

 

810,783

Balance, September 30, 2022

2,900,000

$

2,900

11,278,000

$

11,278

$

7,817,643

$

(2,832,007)

$

4,999,814

See accompanying notes to the unaudited consolidated financial statements.

5

DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

    

For the Nine Months Ended September 30, 

    

2023

    

2022

Cash Flows Provided By Operating Activities:

  

  

Net income

 

$

3,211,876

$

2,753,523

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

 

Amortization of deferred financing costs

 

 

434,847

 

463,008

Amortization of intangible assets

1,465,363

1,465,364

Amortization of right-of-use assets

123,928

94,974

Amortization of capitalized software

159,057

Depreciation of property and equipment

26,112

Stock-based compensation

 

545,504

 

85,437

Forgiveness of Paycheck Protection Program loan

 

 

(287,143)

Deferred income taxes

82,352

(40,591)

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

 

97,740

2,717

Changes in operating assets and liabilities:

Accounts receivable

 

 

(28,381,260)

(13,520,067)

Prepaid expenses and other assets

 

 

(524,098)

482,190

Accounts payable

 

 

27,325,629

10,008,327

Accrued liabilities

 

 

(513,138)

1,555,037

Income taxes payable

(61,083)

94,440

Deferred revenues

 

 

497,359

(201,907)

Operating lease liability

(69,720)

(75,396)

Related party payable

 

 

(70,801)

Net cash provided by operating activities

 

 

4,674,423

3,399,801

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 Used In Financing Activities:

 

 

Proceeds from note payable

4,260,000

Payments on term loan

 

 

(491,250)

(412,500)

Payments of litigation settlement

(193,500)

Payments on lines of credit

(400,000)

Payment of deferred financing costs

 

 

(442,181)

(525,295)

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)

Proceeds from options exercised

215

Proceeds from warrants exercised

 

 

12,100

Distributions to members

 

 

(1,988,333)

(916,433)

Net cash used in financing activities

(3,102,949)

(1,073,436)

Net increase in cash and cash equivalents

 

 

1,434,496

2,326,365

Cash and cash equivalents, beginning of the period

 

4,047,453

 

4,684,431

Cash and cash equivalents, end of the period

$

5,481,949

$

7,010,796

Supplemental Disclosure of Cash Flow Information:

 

 

  

Cash paid for taxes

$

348,862

$

133,401

Cash paid for interest

$

2,667,283

$

1,744,365

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

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

$

90

$

See accompanying notes to the unaudited consolidated financial statements.

6

DIRECT DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Organization and Description of Business

Direct Digital Holdings, Inc., incorporated as a Delaware corporation on August 23, 2021 and headquartered in Houston, Texas, together with its subsidiaries, operates an end-to-end, full-service programmatic advertising platform primarily focused on providing advertising technology, data-driven campaign optimization and other solutions to underserved and less efficient markets on both the buy- and sell-side of the digital advertising ecosystem. Direct Digital Holdings, Inc. is the holding company for Direct Digital Holdings, LLC (“DDH LLC”), which is, in turn, the holding company for the business formed by DDH LLC’s founders in 2018 through the acquisition of Huddled Masses, LLC (“Huddled MassesTM” or “Huddled Masses”) and Colossus Media, LLC (“Colossus Media”). Colossus Media operates the Company’s 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 the Company’s proprietary sell-side operations enables the Company to curate the first through the last mile in the ad tech ecosystem execution process to drive higher results.

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

Basis of presentation

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

7

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

Basis of consolidation

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

Business combinations

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

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

Use of estimates

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

Cash and cash equivalents

Cash and cash equivalents consist of funds deposited with financial institutions and highly liquid instruments with original maturities of three months or less. Such deposits may, at times, exceed federally insured limits. As of September 30, 2023, $4,555,527 of the Company’s cash and cash equivalents exceeded the federally insured limits, none of which is held at Silicon Valley Bank (“SVB”). The Company has not experienced any losses in such amounts and believes it is not exposed to any significant credit risk to cash.

Accounts receivable, net

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 insures a significant portion of its accounts receivable with unrelated third-party insurance companies in an effort to mitigate any future write-offs and establishes an allowance for doubtful accounts as deemed necessary for accounts not covered by this insurance. As of September 30, 2023 and December 31, 2022, the Company’s allowance for

8

doubtful accounts was $46,433 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 $46,208 for the three months ended September 30, 2023 and for the three months ended September 30, 2022, the Company recovered $22,082 on receivables previously written off.  Bad debt expense was $97,740 and $2,717 for the nine months ended September 30, 2023 and 2022, respectively.  

Concentration of customers

There is an inherent concentration of credit risk associated with accounts receivable arising from revenue from major customers on both the buy-side and sell-side of the business.  For the three months ended September 30, 2023 and 2022, one customer represented 82% and 70% of revenues, respectively.  For the nine months ended September 30, 2023 and 2022, one customer represented 72% and 60% of revenues. As of September 30, 2023 and December 31, 2022, one customer accounted for 90% and 80%, respectively, of accounts receivable.

Property and equipment, net

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, estimated at three years.

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, the Company has the option to begin with a qualitative assessment, commonly referred to as “Step 0”, to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying value. 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 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, 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

Intangible assets consist of customer relationships, trademarks and non-compete agreements. Intangible assets are recorded at fair value at the time of their acquisition and are stated within the consolidated balance sheets net of accumulated amortization. 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 the consolidated statements of operations.

9

Impairment of long-lived assets

The Company evaluates long-lived assets, including property and equipment, and acquired intangible assets consisting of customer relationships, trademarks and trade names, and non-compete agreements, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is assessed based on the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds its estimated fair value and is recognized as a reduction in the carrying amount of the asset. As of September 30, 2023 and December 31, 2022, there were no events or changes in circumstances to indicate that the carrying amount of the assets may not be recoverable.

Fair value measurements

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.

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

Deferred financing costs

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 nine months ended September 30, 2022.  On July 26, 2022, the Company repaid the line of credit and terminated the revolving credit facility as of such date and the remaining deferred financing costs of $33,434 were amortized to interest expense during the year ended December 31, 2022. On July 7, 2023, the Company entered into a new revolving credit facility with East West Bank and incurred deferred financing costs of $214,680 during the three months ended September 30, 2023.  Unamortized deferred financing costs related to the new line of credit were $187,845 and $0 as of September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023, $80,505 of these unamortized deferred financ