Direct Digital Holdings(DRCT) - 2024 Q2 - Quarterly Report

Part I. Financial Information This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations ITEM 1. Financial Statements This section presents the company's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, changes in stockholders' deficit, and cash flows, along with detailed notes explaining the company's organization, accounting policies, debt, equity, tax agreements, segment performance, and commitments for the periods ended June 30, 2024, and December 31, 2023 Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' deficit as of June 30, 2024, and December 31, 2023 Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2024 (Unaudited) | December 31, 2023 | | :-------------------------- | :------------------------ | :---------------- | | Cash and cash equivalents | $1,069 | $5,116 | | Accounts receivable, net | $19,517 | $37,207 | | Total current assets | $21,475 | $43,082 | | Total assets | $48,476 | $70,672 | | Accounts payable | $12,372 | $33,926 | | Total current liabilities | $16,335 | $39,802 | | Total liabilities | $57,248 | $74,354 | | Total stockholders' deficit | ($8,772) | ($3,682) | - Total assets decreased by $22.196 million from $70.672 million at December 31, 2023, to $48.476 million at June 30, 2024, primarily due to significant reductions in cash and accounts receivable[6] - Total stockholders' deficit worsened by $5.090 million, increasing from ($3.682) million at December 31, 2023, to ($8.772) million at June 30, 2024[6] Condensed Consolidated Statements of Operations This section outlines the company's financial performance, presenting revenues, expenses, and net loss for the three and six months ended June 30, 2024 and 2023 Condensed Consolidated Statements of Operations (in thousands, except per-share data) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenues | $21,855 | $35,404 | $44,130 | $56,627 | | Gross profit | $5,931 | $10,073 | $10,929 | $16,506 | | Total operating expenses | $7,996 | $7,818 | $15,802 | $14,392 | | (Loss) income from operations | ($2,065) | $2,255 | ($4,873) | $2,114 | | Net (loss) income attributable to Direct Digital Holdings, Inc. | ($590) | $192 | ($1,365) | ($22) | | Basic Net (loss) income per common share | ($0.16) | $0.03 | ($0.38) | ($0.01) | - Total revenues decreased by 38% for the three months and 22% for the six months ended June 30, 2024, compared to the same periods in 2023[7] - The company reported a net loss attributable to Direct Digital Holdings, Inc. of ($590) thousand for the three months and ($1,365) thousand for the six months ended June 30, 2024, a significant decline from net income of $192 thousand and net loss of ($22) thousand, respectively, in the prior year[7] Condensed Consolidated Statements of Changes in Stockholders' Deficit This section details the changes in the company's stockholders' deficit, reflecting the impact of net loss, stock-based compensation, and equity transactions for the period Condensed Consolidated Statements of Changes in Stockholders' Deficit (in thousands) | Metric (in thousands) | Balance, December 31, 2023 | Stock-based compensation | Warrants exercised | Stock options exercised | Issuance of stock in lieu of cash bonus | Net loss | Noncontrolling interest rebalancing | Balance, June 30, 2024 | | :------------------------------ | :------------------------- | :----------------------- | :----------------- | :---------------------- | :-------------------------------------- | :------- | :---------------------------------- | :--------------------- | | Class A Common Stock Amount | $3 | $0 | $0 | $0 | $0 | $0 | $0 | $4 | | Class B Common Stock Amount | $11 | $0 | $0 | $0 | $0 | $0 | $0 | $11 | | Additional paid-in capital | $3,067 | $662 | $215 | $82 | $912 | $0 | ($1,493) | $3,444 | | Accumulated Deficit | ($2,538) | $0 | $0 | $0 | $0 | ($1,365) | $0 | ($3,903) | | Noncontrolling Interest | ($4,225) | $0 | $0 | $0 | $0 | ($5,596) | $1,493 | ($8,328) | | Total Stockholders' Deficit | ($3,682) | $662 | $215 | $82 | $912 | ($6,961) | $0 | ($8,772) | - The total stockholders' deficit increased from ($3,682) thousand at December 31, 2023, to ($8,772) thousand at June 30, 2024, primarily driven by a net loss of ($6,961) thousand[8] - Additional paid-in capital increased due to stock-based compensation, warrant exercises, stock option exercises, and issuance of stock in lieu of cash bonus, partially offset by noncontrolling interest rebalancing[8] Condensed Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2024 and 2023 Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------------------ | :----------------------------- | :----------------------------- | | Net cash (used in) provided by operating activities | ($10,111) | $3,054 | | Net cash used in investing activities | ($10) | ($137) | | Net cash provided by (used in) financing activities | $6,074 | ($1,296) | | Net (decrease) increase in cash and cash equivalents | ($4,047) | $1,621 | | Cash and cash equivalents, beginning of the period | $5,116 | $4,047 | | Cash and cash equivalents, end of the period | $1,069 | $5,668 | - Net cash used in operating activities was ($10,111) thousand for the six months ended June 30, 2024, a significant decrease from $3,054 thousand provided in the prior year, primarily due to the net loss and changes in working capital[13] - Net cash provided by financing activities was $6,074 thousand for the six months ended June 30, 2024, mainly from proceeds from lines of credit and warrant exercises[13] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering accounting policies, debt, equity, and segment information Note 1 — Organization and Description of Business This note describes Direct Digital Holdings, Inc.'s business as an end-to-end programmatic advertising platform and its corporate structure - Direct Digital Holdings, Inc. operates an end-to-end programmatic advertising platform, focusing on underserved and less efficient markets on both the sell- and buy-side of the digital advertising ecosystem[15] - The company is the holding company for Direct Digital Holdings, LLC, which includes Colossus Media, LLC (sell-side programmatic platform, Colossus SSP) and buy-side subsidiaries Huddled Masses, LLC and Orange142, LLC[15][16] - Direct Digital Holdings, Inc. became the sole managing member of DDH LLC, holding 100% of voting interests and 25.8% of economic interests as of June 30, 2024, through an 'Up-C' structure[15][16] Note 2 — Basis of Presentation and Consolidation and Summary of Significant Accounting Policies This note outlines the financial statement preparation basis, revenue recognition policies, and other significant accounting estimates and judgments - The condensed unaudited consolidated financial statements are prepared in accordance with GAAP for interim financial reporting, and the company, as an emerging growth company, has elected the extended transition period for new accounting standards[18][19][21] - Revenue is recognized on a gross basis for both sell-side and buy-side advertising segments, as the company acts as a principal, controlling the specified good or service before transfer to the customer[22][23][24] - The company experiences seasonal fluctuations in revenue, with sell-side advertising typically seeing the largest portion of budgets in Q4, while buy-side advertising peaks in Q2 and Q3 and is lowest in Q1[25] - Goodwill (totaling $6.5 million from acquisitions) and intangible assets are assessed for impairment annually, with no impairment recognized during the six months ended June 30, 2024 and 2023[32][35] - A valuation allowance of $0.5 million was recorded on deferred tax assets as of June 30, 2024, and December 31, 2023, due to uncertainty regarding realization[39][40] - A significant concentration of credit risk exists with one sell-side customer accounting for 64% of accounts receivable as of June 30, 2024, and 62% of revenues for the six months ended June 30, 2024[42] Note 3 — Long-Term Debt This note details the company's long-term debt obligations, including credit facilities and their associated terms, covenants, and interest expenses Long-Term Debt (in thousands) | Long-Term Debt (in thousands) | June 30, 2024 | December 31, 2023 | | :---------------------------- | :------------ | :---------------- | | 2021 Credit Facility | $28,221 | $28,594 | | Credit Agreement (EWB) | $9,700 | $3,000 | | Economic Injury Disaster Loan | $150 | $150 | | Total long-term debt | $38,071 | $31,744 | Interest Expense and Amortization of Deferred Financing Costs (in thousands) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest expense – Lafayette Square | $981 | $890 | $1,955 | $1,769 | | Interest expense – East West Bank | $189 | $0 | $324 | $0 | | Amortization of deferred financing costs | $186 | $136 | $372 | $272 | | Total interest expense and amortization of deferred financing costs | $1,358 | $1,028 | $2,655 | $2,045 | - The Fifth Amendment to the 2021 Credit Facility (Lafayette Square) defers quarterly installment payments until December 31, 2025, and revises financial covenants, including minimum TTM EBITDA and liquidity requirements[66][68] - The Third Amendment to the Credit Agreement (East West Bank) requires prepayments of $1.0 million upon execution, $1.0 million by January 15, 2025, and $2.0 million by April 15, 2025, and mandates filing a registration statement for an equity line of credit[73][74] Note 4 — Stockholders' Deficit and Stock-Based Compensation This note provides information on the company's stockholders' deficit, authorized and outstanding shares, and stock-based compensation expense - As of June 30, 2024, the company's total stockholders' deficit was ($8,772) thousand[8] - The company is authorized to issue 160,000,000 shares of Class A Common Stock and 20,000,000 shares of Class B Common Stock. As of June 30, 2024, Direct Digital Management, LLC (DDM) held 10,868,000 shares of Class B Common Stock[83] Stock-Based Compensation Expense (in thousands) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------------------- | :----------------------------- | :----------------------------- | | Total stock-based compensation expense | $662 | $304 | - Unrecognized stock-based compensation as of June 30, 2024, was $0.3 million for unvested stock options (weighted-average vesting period of 1.09 years) and $0.7 million for unvested Restricted Stock Units (RSUs) (weighted-average vesting period of 1.13 years)[91][92] Note 5 — Tax Receivable Agreement and Income Taxes This note explains the Tax Receivable Agreement, deferred tax assets, valuation allowances, and the company's income tax expense and effective tax rates - The company has a Tax Receivable Agreement (TRA) with DDH LLC and DDM, obligating it to pay 85% of net cash tax savings from certain tax benefits, while retaining 15%[93] Tax Receivable Agreement and Deferred Tax Assets (in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------------------- | :------------ | :---------------- | | TRA Liability (Total) | $5,242 | $5,242 | | Deferred tax asset, net | $6,607 | $6,132 | | Valuation allowance | $500 | $500 | Income Tax Expense (Benefit) and Effective Tax Rate (in thousands) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax expense (benefit) | ($274) | $74 | ($475) | $0 | | Effective income tax rate | 8.0% | 5.8% | 6.4% | 0% | - The effective tax rates were lower than statutory rates primarily due to the company's partnership loss not subject to federal and state taxes under the Up-C structure[98] Note 6 — Related Party Transactions This note discloses transactions and balances with related parties, primarily concerning the Up-C structure and member receivables Related Party Receivable (in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------- | :------------ | :---------------- | | Net receivable from members | $1,737 | $1,737 | - The Up-C structure allows DDM to retain equity ownership in DDH LLC and realize tax benefits associated with owning interests in a pass-through entity, including potential liquidity through exchanges of LLC Units for Class A Common Stock[103] Note 7 — Segment Information This note presents financial data segmented by the company's sell-side and buy-side advertising operations, including revenues, operating loss, and assets Revenue by Business Segment (in thousands) | Segment | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :---------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Sell-side advertising | $14,298 | $23,601 | $30,799 | $37,384 | | Buy-side advertising | $7,557 | $11,803 | $13,331 | $19,243 | | Total revenues | $21,855 | $35,404 | $44,130 | $56,627 | Operating Loss by Business Segment (in thousands) | Segment | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Sell-side advertising | $447 | $2,172 | $1,409 | $3,450 | | Buy-side advertising | $1,848 | $3,924 | $2,141 | $5,429 | | Corporate office expenses | ($4,360) | ($3,841) | ($8,423) | ($6,765) | | Total operating loss | ($2,065) | $2,255 | ($4,873) | $2,114 | Total Assets by Business Segment (in thousands) | Segment | June 30, 2024 | December 31, 2023 | | :---------------------- | :------------ | :---------------- | | Sell-side advertising | $15,302 | $34,354 | | Buy-side advertising | $22,560 | $22,539 | | Corporate office | $10,614 | $13,779 | | Total assets | $48,476 | $70,672 | Note 8 — Net (Loss) Income Per Share This note details the calculation of basic and diluted net loss per common share, including the weighted-average shares outstanding Net (Loss) Income Per Common Share | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic Net (loss) income per common share | ($0.16) | $0.03 | ($0.38) | ($0.01) | | Diluted Net (loss) income per common share | ($0.16) | $0.03 | ($0.38) | ($0.01) | Weighted-Average Number of Shares of Common Stock Outstanding (in thousands) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic | 3,701 | 2,921 | 3,604 | 2,912 | | Diluted | 3,701 | 3,113 | 3,604 | 2,912 | - Class B Common Stock (10,868 thousand shares), warrants, and unvested restricted stock units were excluded from diluted net loss per share calculations for the six months ended June 30, 2024, as their inclusion would have been anti-dilutive[111] Note 9 — Commitments and Contingencies This note outlines the company's legal proceedings, including a class action lawsuit and a defamation lawsuit, and future operating lease obligations - The company is a defendant in a consolidated putative class action lawsuit alleging violations of federal securities laws related to alleged false or misleading disclosures[113] - A defamatory article/blog post in May 2024 led to a temporary pause in connection with a sell-side customer, impacting volumes. The customer reconnected on May 22, 2024, but volumes have not yet returned to prior levels. The company filed a lawsuit against the author[114] Future Operating Lease Payments (in thousands) | Year | Total Undiscounted Lease Payments | | :--------- | :-------------------------------- | | 2024 | $128 | | 2025 | $258 | | 2026 | $265 | | 2027 | $269 | | 2028 | $167 | | Thereafter | $200 | | Total | $1,287 | Note 10 — Property, Equipment and Software, net This note provides details on the company's property, equipment, and software, including gross amounts, accumulated depreciation, and related expenses Property, Equipment and Software, Net (in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------------------- | :------------ | :---------------- | | Property, equipment and software, gross | $895 | $886 | | Less: accumulated depreciation and amortization | ($424) | ($287) | | Total property, equipment and software, net | $471 | $599 | Depreciation and Amortization Expense (in thousands) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total depreciation and amortization | $68 | $65 | $137 | $121 | Note 11 — Intangible Assets, net This note presents the company's intangible assets, such as customer lists and trademarks, along with their net book value and amortization schedules Intangible Assets, Net (in thousands) | Intangible Asset | June 30, 2024 | December 31, 2023 | | :------------------------ | :------------ | :---------------- | | Customer Lists | $8,143 | $8,794 | | Trademarks and tradenames | $2,188 | $2,363 | | Non-compete agreements | $376 | $527 | | Total intangible assets, net | $10,707 | $11,684 | Amortization Expense for Intangible Assets (in thousands) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Amortization expense | $500 | $500 | $1,000 | $1,000 | Future Amortization Expense for Intangible Assets (in thousands) | Year | Amount | | :--------- | :----- | | 2024 | $977 | | 2025 | $1,879 | | 2026 | $1,653 | | 2027 | $1,653 | | 2028 | $1,653 | | Thereafter | $2,892 | | Total | $10,707 | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results for the three and six months ended June 30, 2024, covering performance drivers, revenue, expenses, liquidity, and going concern issues Cautionary Note Regarding Forward-Looking Statements This section warns that the report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements that involve estimates and uncertainties, which could cause actual results to differ materially from projections[126] - Key risk factors include restrictions from credit facilities, substantial doubt about the company's ability to continue as a going concern, challenges in securing additional financing, Nasdaq listing compliance, high customer concentration, and operational issues[127][128] Overview This section introduces Direct Digital Holdings, Inc. as an end-to-end programmatic advertising platform operating sell-side and buy-side segments - Direct Digital Holdings, Inc. operates an end-to-end, full-service programmatic advertising platform headquartered in Houston, Texas, specializing in advertising technology and data-driven campaign optimization for underserved and less efficient markets[130] - The company operates two reportable segments: sell-side advertising (Colossus Media/Colossus SSP) and buy-side advertising (Orange 142 and Huddled Masses), providing technology-enabled advertising solutions and consulting services[130][131][132][133] Recent Developments This section highlights recent events including Nasdaq non-compliance, financial restatements, and the impact of a defamatory article on sell-side volumes - The company received Nasdaq notices for failing to timely file its 2023 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for Q1 and Q2 2024, but expects to regain compliance upon filing the current report[135] - Interim financial statements for Q1, Q2, and Q3 2023 were restated due to accounting errors concerning noncontrolling interests, organizational transactions, EPS presentation, and the timing of 2023 warrant redemption[136] - A defamatory article in May 2024 caused a key sell-side customer to temporarily pause its connection, impacting sell-side volumes. The customer reconnected, but volumes have not returned to prior levels, and the company has initiated a lawsuit against the author[137][138] Key Factors Affecting Our Performance This section discusses the drivers of growth for both sell-side and buy-side advertising segments, including customer acquisition, impression monetization, and client retention - Sell-side advertising growth is driven by increasing revenue from customers through direct Supply Path Optimization agreements, reaching a broad ecosystem of buyers (156,000 average monthly advertisers in Q2 2024, up 31% YoY)[139] - The company focuses on monetizing digital impressions by coordinating real-time auctions and bids, ensuring ad inventory quality by mitigating invalid traffic (IVT) through technology and direct publisher relationships[141][142] - Buy-side advertising growth relies on acquiring new small and mid-sized clients across various industries and expanding sales to existing customers, leveraging a high client retention rate (approximately 90% for top 80% revenue clients)[148][149][150] - Both sell-side and buy-side segments experience seasonal revenue fluctuations, with Q4 typically highest for sell-side and Q2/Q3 highest for buy-side[147][154] Components of Our Results of Operations This section explains the sources of revenue from sell-side and buy-side advertising and the composition of cost of revenues and operating expenses - Revenue is generated from sell-side advertising (selling ad inventory from publishers) and buy-side advertising (managed campaigns for purchasing digital ad space)[155] - The company reports revenue on a gross basis, inclusive of all supplier costs, as it acts as a principal in both sell-side and buy-side advertising segments[156] - Cost of revenues for sell-side includes publisher media fees and data center costs, while for buy-side, it includes digital media fees and third-party platform access fees. Operating expenses encompass compensation, general and administrative costs, and other net expenses[157][158][159] Results of Operations This section provides a detailed analysis of the company's revenue, gross profit, operating expenses, and net loss for the current and prior periods Revenue Performance (in thousands) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenues | $21,855 | $35,404 | $44,130 | $56,627 | | Sell-side advertising revenue | $14,298 | $23,601 | $30,799 | $37,384 | | Buy-side advertising revenue | $7,557 | $11,803 | $13,331 | $19,243 | Profitability and Expenses (in thousands) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Gross profit | $5,931 | $10,073 | $10,929 | $16,506 | | Operating expenses | $7,996 | $7,818 | $15,802 | $14,392 | | Loss from operations | ($2,065) | $2,255 | ($4,873) | $2,114 | | Net loss | ($3,141) | $1,195 | ($6,961) | ($139) | - Sell-side advertising revenue decreased by 39% for the three months and 18% for the six months ended June 30, 2024, primarily due to a customer pausing its connection in May 2024, leading to a 27% decrease in average monthly impressions sold[162][163] - Interest expense increased by 32% for the three months and 30% for the six months ended June 30, 2024, due to additional net borrowings of $12.6 million under credit facilities and higher interest rates[179] Liquidity and Capital Resources This section addresses the company's financial liquidity, capital resources, going concern issues, and management's plans to improve its financial position - The company faces substantial doubt about its ability to continue as a going concern due to a $7.0 million net loss in H1 2024, a $3.9 million accumulated deficit, $1.1 million in cash, $9.7 million borrowed under the Credit Agreement, auditor resignation, and delayed SEC filings[55][180] - Management's actions to address liquidity include staff reductions, hiring freezes, cost savings measures (effective July 1, 2024), working with lenders for debt covenant relief, raising capital, and regaining SEC filing compliance[56][181][182] Liquidity Metrics (in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $1,069 | $5,116 | | Working capital | $5,140 | $3,280 | | Availability under Credit Agreement | $300 | $7,000 | - Net cash used in operating activities was ($10.1) million for the six months ended June 30, 2024, primarily due to the net loss and a $21.6 million decrease in accounts payable, partially offset by a $17.7 million decrease in accounts receivable[185][186] - Net cash provided by financing activities was $6.1 million for the six months ended June 30, 2024, mainly from $6.7 million in line of credit proceeds and $0.2 million from warrant exercises[189] Non-GAAP Financial Measures This section presents Adjusted EBITDA as a non-GAAP financial measure used by management to assess operating performance and efficiency - The company uses Adjusted EBITDA, a non-GAAP measure, to evaluate operating performance and operational efficiency, providing comparability with past performance and peer companies[191][192] Adjusted EBITDA Reconciliation (in thousands) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | ($3,141) | $1,195 | ($6,961) | ($139) | | Adjusted EBITDA | ($1,343) | $3,061 | ($3,005) | $3,608 | Critical Accounting Estimates and Related Policies This section highlights the significant accounting estimates and assumptions made in preparing the financial statements and notes no material changes from the prior annual report - The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses[194] - There have been no material changes to the critical accounting estimates and related policies compared to the Annual Report on Form 10-K for the fiscal year ended December 31, 2023[194] Recent Accounting Pronouncements This section outlines recently issued accounting standards updates by the FASB, including those related to income tax disclosures and segment reporting - The FASB issued ASU 2023-09, 'Improvements to Income Tax Disclosures,' effective for emerging growth companies for annual periods beginning after December 15, 2025[51] - The FASB issued ASU 2023-07, 'Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures,' effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024[52][53] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Direct Digital Holdings, Inc. is not required to provide quantitative and qualitative disclosures about market risk in this quarterly report - As a 'smaller reporting company,' the registrant is not required to provide quantitative and qualitative disclosures about market risk[196] ITEM 4. Controls and Procedures This section addresses the effectiveness of the company's disclosure controls and internal controls over financial reporting, concluding they were not effective due to material weaknesses and outlining remediation plans Evaluation of Disclosure Controls and Procedures This section reports that the company's disclosure controls and procedures were deemed ineffective as of June 30, 2024, due to identified material weaknesses - The CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of June 30, 2024, due to identified material weaknesses[197] Management's Annual Report on Internal Controls Over Financial Reporting This section states that management concluded the company's internal controls over financial reporting were ineffective due to material weaknesses, leading to prior financial statement restatements - Management concluded that the company's internal controls over financial reporting were not effective as of June 30, 2024[201] - Material weaknesses were identified in controls over journal entry processes, information technology general controls (ITGC), and the technical evaluation of accounting matters[202] - These material weaknesses resulted in prior-period accounting errors and the restatement of unaudited interim consolidated financial statements for Q1, Q2, and Q3 2023[202][203] Management's Plan to Remediate the Previously Reported Material Weaknesses This section outlines management's ongoing remediation efforts to address identified material weaknesses in internal controls, including engaging consultants and enhancing control designs - Management has implemented remediation steps, including engaging consultants to identify and test control designs over business processes and ITGC[204] - Remediation efforts include enhancing controls over segregation of duties in journal entry processes, access to IT program and change management, and the evaluation of technical accounting matters[204] - While remediation steps are in progress, the material weaknesses are not considered fully remediated until the improved controls have operated for a sufficient period and been tested for effectiveness[205] Changes in Internal Controls Over Financial Reporting This section confirms no other material changes in internal controls over financial reporting occurred during the period, apart from the identified weaknesses and remediation - No other material changes in internal controls over financial reporting occurred during the six months ended June 30, 2024, beyond the identified material weaknesses and remediation efforts[206] Part II. Other Information This part covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits ITEM 1. Legal Proceedings The company is involved in a class action lawsuit and a defamation lawsuit, the latter impacting sell-side customer volumes, with management intending to vigorously defend all claims - The company is a defendant in a consolidated putative class action lawsuit alleging violations of federal securities laws related to alleged false or misleading disclosures[208] - The company filed a lawsuit against the author of a defamatory article/blog post from May 2024, which caused a temporary pause in connection with a sell-side customer and impacted volumes[209][114] ITEM 1A. Risk Factors This section states that risk factors are 'Not applicable' for this quarterly report, implying no new material changes from the annual report - Risk Factors are 'Not applicable'[210] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds from such sales during the period - There were no unregistered sales of equity securities or use of proceeds from such sales[210] ITEM 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - No defaults upon senior securities were reported[211] ITEM 4. Mine Safety Disclosures This section states that mine safety disclosures are 'Not applicable' - Mine Safety Disclosures are 'Not applicable'[211] ITEM 5. Other Information During the six months ended June 30, 2024, no director or officer adopted or terminated a 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement' - No director or officer adopted or terminated a 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement' during the six months ended June 30, 2024[211] ITEM 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and Inline XBRL documents - The report includes certifications from the CEO and CFO (Exhibits 31.1, 31.2, 32.1, 32.2) and various Inline XBRL documents (Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[213] SIGNATURES The report is duly signed on behalf of Direct Digital Holdings, Inc. by Diana P. Diaz, Chief Financial Officer, on October 15, 2024 - The report was signed by Diana P. Diaz, Chief Financial Officer of Direct Digital Holdings, Inc., on October 15, 2024[215]