Direct Digital Holdings(DRCT) - 2024 Q1 - Quarterly Report

Part I. Financial Information This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the company Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Direct Digital Holdings, Inc. and its subsidiaries, including balance sheets, statements of operations, changes in stockholders' deficit, and cash flows for the three months ended March 31, 2024 and 2023. It also includes detailed notes explaining the company's organization, significant accounting policies, debt, equity, tax agreements, segment information, and commitments Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and stockholders' deficit at specific reporting dates Table: Condensed Consolidated Balance Sheets (in thousands) | Metric (in thousands) | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------- | :---------------- | | Total Assets | $52,770 | $70,672 | | Total Liabilities | $58,560 | $74,354 | | Total Stockholders' Deficit | $(5,790) | $(3,682) | - Total assets decreased by $17.9 million (25.3%) from December 31, 2023, to March 31, 2024, primarily driven by a significant reduction in accounts receivable and cash[7] - Total liabilities decreased by $15.8 million (21.3%) over the same period, mainly due to a decrease in accounts payable and accrued liabilities[7] - Stockholders' deficit worsened by $2.1 million, increasing from $(3,682) thousand to $(5,790) thousand[7] Condensed Consolidated Statements of Operations This statement details the company's revenues, expenses, and net loss over the reporting periods Table: Condensed Consolidated Statements of Operations (in thousands, except per-share) | Metric (in thousands, except per-share) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Total Revenues | $22,275 | $21,223 | | Sell-side advertising revenue | $16,500 | $13,783 | | Buy-side advertising revenue | $5,775 | $7,440 | | Total Cost of Revenues | $17,277 | $14,790 | | Gross Profit | $4,998 | $6,433 | | Loss from Operations | $(2,807) | $(141) | | Net Loss | $(3,819) | $(1,334) | | Net Loss Attributable to DDH, Inc. | $(775) | $(214) | | Basic Net Loss Per Common Share | $(0.22) | $(0.07) | | Diluted Net Loss Per Common Share | $(0.22) | $(0.07) | - Total revenues increased by 5% year-over-year, driven by a 20% increase in sell-side advertising revenue, partially offset by a 22% decrease in buy-side advertising revenue[9] - Gross profit decreased by 22% due to a higher increase in cost of revenues (17%) compared to revenue growth, leading to a lower gross margin[9] - Net loss significantly widened by 186% from $(1,334) thousand in Q1 2023 to $(3,819) thousand in Q1 2024, primarily due to increased operating expenses and interest expense[9] Condensed Consolidated Statements of Changes in Stockholders' Deficit This statement tracks changes in the company's equity components, including net loss and stock-based transactions Table: Condensed Consolidated Statements of Changes in Stockholders' Deficit (in thousands, except share data) | Metric (in thousands, except share data) | Balance, Dec 31, 2023 | Stock-based Compensation | Warrants Exercised | Stock Options Exercised | Issuance of Stock in lieu of cash bonus | Net Loss | Noncontrolling Interest Rebalancing | Balance, Mar 31, 2024 | | :--------------------------------------- | :-------------------- | :----------------------- | :----------------- | :---------------------- | :-------------------------------------- | :------- | :---------------------------------- | :-------------------- | | Class A Common Stock Amount | $3 | — | — | — | — | — | — | $4 | | Class B Common Stock Amount | $11 | — | — | — | — | — | — | $11 | | Additional Paid-in Capital | $3,067 | $504 | $215 | $79 | $913 | — | $(1,336) | $3,441 | | Accumulated Deficit | $(2,538) | — | — | — | — | $(775) | — | $(3,313) | | Noncontrolling Interest | $(4,225) | — | — | — | — | $(3,044) | $1,336 | $(5,933) | | Total Stockholders' Deficit | $(3,682) | $504 | $215 | $79 | $913 | $(3,819) | — | $(5,790) | - The total stockholders' deficit increased from $(3,682) thousand at December 31, 2023, to $(5,790) thousand at March 31, 2024, primarily due to a net loss of $(3,819) thousand[10] - Additional paid-in capital increased by $374 thousand, driven by stock-based compensation, warrant exercises, stock option exercises, and stock issuance in lieu of cash bonuses, partially offset by noncontrolling interest rebalancing[10] Condensed Consolidated Statements of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities Table: Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net Cash (Used In) Provided By Operating Activities | $(5,704) | $3,100 | | Net Cash Used In Investing Activities | $0 | $(48) | | Net Cash Provided By (Used In) Financing Activities | $3,922 | $(380) | | Net (Decrease) Increase in Cash and Cash Equivalents | $(1,782) | $2,672 | | Cash and Cash Equivalents, End of Period | $3,334 | $6,719 | - Operating activities used $5.7 million in cash in Q1 2024, a significant decrease from $3.1 million provided in Q1 2023, primarily due to a larger net loss and changes in working capital, including a substantial decrease in accounts payable[12][174][175] - Financing activities provided $3.9 million in Q1 2024, mainly from proceeds from lines of credit and warrant exercises, contrasting with $0.4 million used in Q1 2023[12][178] - Overall cash and cash equivalents decreased by $1.8 million in Q1 2024, resulting in an end-of-period balance of $3.3 million, down from $6.7 million in Q1 2023[12] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1 — Organization and Description of Business This note describes the company's business operations, organizational structure, and key subsidiaries - Direct Digital Holdings, Inc. operates an end-to-end programmatic advertising platform focusing on underserved markets, with subsidiaries Colossus Media (sell-side) and Orange142 and Huddled Masses (buy-side)[14][16] - The company utilizes an 'Up-C' structure, where Direct Digital Holdings, Inc. is the sole managing member of DDH LLC, holding 100% of voting interests and 25.3% of economic interests as of March 31, 2024[14][15] Note 2 — Basis of Presentation and Consolidation and Summary of Significant Accounting Policies This note outlines the financial statement preparation basis, consolidation principles, and critical accounting policies - The company is an emerging growth company and has elected to use the extended transition period for new accounting standards, which may affect comparability[20] - Revenue is recognized on a gross basis as the company acts as a principal in both sell-side and buy-side advertising segments, controlling goods/services before transfer to customers[23] - The company experiences seasonal fluctuations in revenue, with Q4 typically highest for sell-side and Q2/Q3 highest for buy-side, while Q1 is the lowest for buy-side[24] - Goodwill of $6.5 million (unchanged from Dec 31, 2023) was not impaired during the three months ended March 31, 2024 and 2023[31] - Stock-based compensation expense was $0.5 million in Q1 2024, up from $0.1 million in Q1 2023[87] - One sell-side customer represented 68% of revenues and 71% of accounts receivable as of March 31, 2024, indicating high customer concentration[41] - The company has identified substantial doubt about its ability to continue as a going concern due to a net loss, accumulated deficit, low cash, increased borrowings, auditor resignation, and delayed SEC filings, exacerbated by a temporary pause from a key sell-side customer[53] - Management is implementing expense reductions, seeking debt covenant relief, raising capital, and working to regain SEC filing compliance to address going concern issues[54] Note 3 — Long-Term Debt This note details the company's long-term debt obligations, including credit facilities and interest expenses Table: Debt Component (in thousands) | Debt Component (in thousands) | March 31, 2024 | December 31, 2023 | | :---------------------------- | :------------- | :---------------- | | 2021 Credit Facility | $28,221 | $28,594 | | Credit Agreement (EWB) | $7,000 | $3,000 | | EIDL | $150 | $150 | | Total Long-Term Debt | $35,371 | $31,744 | | Less: Deferred Financing Costs | $(1,542) | $(1,688) | | Less: Current Portion | $(1,473) | $(1,478) | | Total Long-Term Debt, net of current portion | $32,356 | $28,578 | - Total long-term debt increased by $3.6 million from December 31, 2023, to March 31, 2024, primarily due to increased borrowings under the East West Bank Credit Agreement[57] Table: Interest Expense Component (in thousands) | Interest Expense Component (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Interest expense – Lafayette Square | $974 | $879 | | Interest expense – East West Bank | $136 | $0 | | Amortization of deferred financing costs | $186 | $136 | | Total Interest Expense | $1,297 | $1,017 | - Interest expense increased by 27% year-over-year, driven by additional net borrowings and higher interest rates[58][166] - The company entered into the Fifth Amendment to the 2021 Credit Facility (Lafayette Square) and the Third Amendment to the Credit Agreement (East West Bank) with effective dates of June 30, 2024, to defer installment payments, adjust covenants, and require prepayments from potential equity raises[64][71] Note 4 — Stockholders' Deficit and Stock-Based Compensation This note provides information on the company's equity structure, stock-based awards, and related compensation expenses - As of March 31, 2024, there were 3,684,278 shares of Class A Common Stock and 10,868,000 shares of Class B Common Stock outstanding[7] - The company completed a warrant tender offer and redemption in Q4 2023, resulting in all initial public offering warrants no longer outstanding as of March 31, 2024[85] - Stock-based compensation expense recognized was $0.5 million for Q1 2024, up from $0.1 million in Q1 2023[87] Table: Stock Option Activity (in thousands, except price) | Stock Option Activity (in thousands, except price) | Shares | Weighted Average Exercise Price | | :------------------------------------------------- | :----- | :------------------------------ | | Outstanding at January 1, 2024 | 371 | $2.51 | | Exercised | (8) | $2.62 | | Forfeited | (1) | $2.69 | | Outstanding at March 31, 2024 | 361 | $2.51 | | Vested and exercisable at March 31, 2024 | 103 | $2.55 | Table: Restricted Stock Units Activity (in thousands, except value) | Restricted Stock Units Activity (in thousands, except value) | Number of Shares | Weighted Average Grant Date Fair Value per Share | | :----------------------------------------------------------- | :--------------- | :----------------------------------------------- | | Unvested - January 1, 2024 | 542 | $2.87 | | Granted | 99 | $16.90 | | Vested | (229) | $11.83 | | Forfeited | (1) | $3.28 | | Unvested - March 31, 2024 | 412 | $2.53 | Note 5 — Tax Receivable Agreement and Income Taxes This note explains the Tax Receivable Agreement and the company's income tax positions and deferred tax assets - 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[91] - The TRA liability remained at $5.2 million as of March 31, 2024, and December 31, 2023[93][101] - A deferred tax asset of $6.3 million (net of $0.5 million valuation allowance) was recorded as of March 31, 2024[93] - The company recorded an income tax benefit of $(200) thousand in Q1 2024, with an effective tax rate of 5.0%, lower than statutory rates due to partnership loss not subject to federal and state taxes[96] Note 6 — Related Party Transactions This note discloses transactions and balances with related parties, including members and the Up-C structure - A net receivable from members totaled $1.7 million as of March 31, 2024, and December 31, 2023[99] - The Up-C structure allows DDM to retain tax benefits from partnership treatment and provides liquidity through LLC Unit exchanges for Class A Common Stock[100] Note 7 — Segment Information This note presents financial data broken down by the company's operating segments: sell-side and buy-side advertising Table: Metric (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Sell-side advertising revenue | $16,500 | $13,783 | | Buy-side advertising revenue | $5,775 | $7,440 | | Total Revenues | $22,275 | $21,223 | Table: Operating Loss by Segment (in thousands) | Operating Loss by Segment (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Sell-side advertising | $962 | $1,278 | | Buy-side advertising | $293 | $1,505 | | Corporate office expenses | $(4,062) | $(2,924) | | Total Operating Loss | $(2,807) | $(141) | Table: Total Assets by Segment (in thousands) | Total Assets by Segment (in thousands) | March 31, 2024 | December 31, 2023 | | :------------------------------------- | :------------- | :---------------- | | Sell-side advertising | $17,934 | $34,354 | | Buy-side advertising | $22,569 | $22,539 | | Corporate office | $12,267 | $13,779 | | Total Assets | $52,770 | $70,672 | - Sell-side advertising revenue increased by 20% while buy-side advertising revenue decreased by 22% year-over-year[102] - Corporate office expenses significantly increased, contributing to a higher total operating loss[102] Note 8 — Net Loss Per Share This note provides the calculation of basic and diluted net loss per common share for the reporting periods Table: Metric (in thousands, except per share) | Metric (in thousands, except per share) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net Loss Attributable to DDH, Inc. | $(775) | $(214) | | Weighted Average Common Shares - Basic | 3,509 | 2,901 | | Weighted Average Common Shares - Diluted | 3,509 | 2,901 | | Basic Net Loss Per Common Share | $(0.22) | $(0.07) | | Diluted Net Loss Per Common Share | $(0.22) | $(0.07) | - Basic and diluted net loss per common share increased from $(0.07) in Q1 2023 to $(0.22) in Q1 2024[105] - Class B Common Stock, warrants, options, and unvested restricted stock units were excluded from diluted EPS calculation as they were anti-dilutive[106] Note 9 — Commitments and Contingencies This note outlines the company's legal proceedings, customer-related issues, and operating lease obligations - The company is facing two consolidated putative class action lawsuits alleging federal securities law violations related to false or misleading disclosures[108] - A key sell-side customer paused its connection in May 2024 due to a defamatory article/blog post, impacting sell-side volumes, which have resumed but not to prior levels. The company has filed a lawsuit against the author[109][110] Table: Operating Lease Future Payments (in thousands) | Operating Lease Future Payments (in thousands) | Amount | | :--------------------------------------------- | :----- | | 2024 | $156 | | 2025 | $239 | | 2026 | $160 | | 2027 | $163 | | 2028 | $167 | | Thereafter | $200 | | Total Undiscounted Lease Payments | $1,085 | | Less Effects of Discounting | $(206) | | Less Current Lease Liability | $(151) | | Total Operating Lease Liability, net of current portion | $728 | Note 10 — Property, Equipment and Software, net This note details the company's property, equipment, and software assets, including depreciation and amortization Table: Asset Category (in thousands) | Asset Category (in thousands) | March 31, 2024 | December 31, 2023 | | :---------------------------- | :------------- | :---------------- | | Furniture and fixtures | $128 | $128 | | Computer equipment | $20 | $20 | | Leasehold improvements | $36 | $36 | | Capitalized software | $702 | $702 | | Gross Property, Equipment and Software | $886 | $886 | | Less: Accumulated Depreciation and Amortization | $(357) | $(287) | | Total Property, Equipment and Software, net | $529 | $599 | - Net property, equipment, and software decreased by $70 thousand from December 31, 2023, to March 31, 2024, primarily due to increased accumulated depreciation and amortization[113] - Total depreciation and amortization expense for property, equipment, and software was $71 thousand in Q1 2024, up from $57 thousand in Q1 2023[115] Note 11 — Intangible Assets, net This note provides information on the company's intangible assets, their net book value, and amortization schedule Table: Intangible Asset (in thousands) | Intangible Asset (in thousands) | March 31, 2024 Net Total | December 31, 2023 Net Total | | :------------------------------ | :----------------------- | :-------------------------- | | Customer Lists | $8,468 | $8,794 | | Trademarks and Tradenames | $2,276 | $2,363 | | Non-compete agreements | $451 | $527 | | Total Intangible Assets, net | $11,195 | $11,684 | - Net intangible assets decreased by $489 thousand from December 31, 2023, to March 31, 2024, due to ongoing amortization[117] - Amortization expense for intangible assets was $0.5 million for both Q1 2024 and Q1 2023[116] Table: Future Amortization Expense (in thousands) | Future Amortization Expense (in thousands) | Amount | | :----------------------------------------- | :----- | | 2024 | $1,464 | | 2025 | $1,879 | | 2026 | $1,653 | | 2027 | $1,653 | | 2028 | $1,653 | | Thereafter | $2,893 | | Total | $11,195| 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 results of operations for the three months ended March 31, 2024, compared to the same period in 2023. It highlights recent developments, key performance drivers, detailed financial comparisons, liquidity challenges including a going concern warning, and non-GAAP financial measures Cautionary Note Regarding Forward-Looking Statements This section warns that the report contains forward-looking statements subject to risks and uncertainties that may cause actual results to differ - The report contains forward-looking statements subject to risks and uncertainties, which could cause actual results to differ materially from projections[119][120] - Key risk factors include restrictions from credit facilities, substantial doubt about going concern, inability to secure additional financing, potential Nasdaq delisting, costs of financial restatement, high customer concentration, and operational issues[120][121] Overview This section provides a high-level description of Direct Digital Holdings' business model and operating segments - Direct Digital Holdings operates an end-to-end programmatic advertising platform, focusing on underserved markets for both sell-side (Colossus Media) and buy-side (Huddled Masses, Orange142) advertising[123][124][125] - The company operates two reportable segments: sell-side advertising (Colossus Media) and buy-side advertising (Orange142 and Huddled Masses), with all revenues attributable to the United States[126] Recent Developments This section outlines significant events impacting the company, including Nasdaq compliance, financial restatements, and customer issues - The company received Nasdaq notices for failing to timely file its 2023 Annual Report and Q1/Q2 2024 Quarterly Reports, but has since filed the 2023 Annual Report and Q1 2024 Quarterly Report, with one remaining delinquent filing[128] - Interim financial statements for Q1, Q2, and Q3 2023 were restated due to errors in accounting for noncontrolling interests, organizational transactions, earnings per share, and warrant redemption timing[129] - A key sell-side customer temporarily paused its connection in May 2024 following a defamatory article, impacting sell-side volumes, which have resumed but not yet to prior levels. The company has filed a lawsuit against the article's author[130] Key Factors Affecting Our Performance This section discusses the primary drivers influencing the performance of the company's sell-side and buy-side advertising segments - Sell-side performance is driven by increasing advertising spend from buyers (reaching 141,000 advertisers/month in Q1 2024), monetizing ad impressions for publishers and buyers, enhancing ad inventory quality, growing access to valuable ad impressions (830 billion average monthly bid requests in Q1 2024, up 107% YoY), expanding investments in platform technology, and adapting to industry dynamics like header bidding[132][134][135][136][137][138] - Buy-side performance relies on new customer acquisitions (serving over 230 small and mid-sized clients), expanding sales to existing customers (90% client retention for 80% of revenue), and capitalizing on the shift to digital advertising and increased adoption by small- and mid-sized companies[140][142][144][145] - Both segments experience seasonality, with Q4 being strongest for sell-side and Q2/Q3 strongest for buy-side, while Q1 is the lowest for buy-side[139][146] Components of Our Results of Operations This section defines the key revenue, cost of revenue, operating expense, and other expense components of the company's financial results - Revenue is generated from sell-side advertising (selling ad inventory from publishers) and buy-side advertising (managed advertising campaigns for customers), recognized on a gross basis as the company acts as a principal[147][148] - Cost of revenues primarily includes publisher media fees and data center costs for sell-side, and digital media fees, third-party platform access fees for buy-side[149] - Operating expenses comprise compensation, taxes and benefits, general and administrative expenses (including amortization of intangibles), and other unusual/infrequent expenses[150][151] - Other expense, net, includes other income (e.g., recovery of receivables), interest expense, and loss on early termination of lines of credit[152] Results of Operations (Comparison of the Three Months Ended March 31, 2024 and 2023) This section provides a detailed comparative analysis of the company's financial performance for the three months ended March 31, 2024 and 2023 Consolidated Results of Operations (in thousands) | Metric | Q1 2024 | Q1 2023 | Change Amount | Change % | | :----------------------------- | :------ | :------ | :------------ | :------- | | Revenues | $22,275 | $21,223 | $1,052 | 5% | | Sell-side advertising | $16,500 | $13,783 | $2,717 | 20% | | Buy-side advertising | $5,775 | $7,440 | $(1,665) | (22)% | | Cost of revenues | $17,277 | $14,790 | $2,487 | 17% | | Gross profit | $4,998 | $6,433 | $(1,435) | (22)% | | Operating expenses | $7,805 | $6,574 | $1,231 | 19% | | Loss from operations | $(2,807)| $(141) | $(2,665) | *nm | | Other expense, net | $(1,212)| $(1,267)| $55 | (4)% | | Loss before income taxes | $(4,019)| $(1,408)| $(2,611) | 185% | | Net loss | $(3,819)| $(1,334)| $(2,485) | 186% | | Adjusted EBITDA | $(1,659)| $549 | $(2,208) | (402)% | - Sell-side advertising revenue increased by 20% due to higher impression inventory and publisher engagement, with average monthly impressions sold up 7% and bid requests up 107%[155] - Buy-side advertising revenue decreased by 22% due to reduced spending from existing customers and a shift in campaign timing[155] - Gross profit declined by 22% and gross margin decreased from 30% to 22%, primarily due to the revenue mix shift towards lower-margin sell-side and increased fixed costs for server capacity[157][158] - Operating expenses increased by 19%, driven by a 24% rise in compensation, taxes, and benefits (due to headcount additions and stock compensation) and a 12% rise in general and administrative expenses (higher professional fees and software licenses)[160][161][163] - Interest expense increased by 27% to $1.3 million due to additional net borrowings and higher interest rates[165][166] Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations and funding sources - The company faces substantial doubt about its ability to continue as a going concern due to a net loss, accumulated deficit, low cash ($3.3 million as of March 31, 2024), increased debt, auditor resignation, and delayed SEC filings, compounded by a key customer's temporary pause[167][168] - Management's actions to address liquidity include expense reduction (staff reduction, hiring pause), seeking debt covenant relief, raising capital, and regaining SEC filing compliance[169] Table: Metric (in thousands) | Metric (in thousands) | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------- | :---------------- | | Cash and cash equivalents | $3,334 | $5,116 | | Working capital | $5,343 | $3,280 | | Availability under Credit Agreement | $3,000 | $7,000 | - Net cash used in operating activities was $5.7 million in Q1 2024, a significant decline from $3.1 million provided in Q1 2023, primarily due to a net loss and a large decrease in accounts payable[172][174][175] - Net cash provided by financing activities was $3.9 million in Q1 2024, mainly from proceeds from lines of credit ($4.0 million) and warrant exercises ($0.2 million)[178] Table: Future Minimum Debt Payments (in thousands) | Future Minimum Debt Payments (in thousands) | Amount | | :------------------------------------------ | :----- | | 2024 | $1,105 | | 2025 | $8,460 | | 2026 | $25,660| | 2027 | $3 | | 2028 | $3 | | Thereafter | $140 | | Total | $35,371| Non-GAAP Financial Measures This section presents and reconciles non-GAAP financial measures used by management to evaluate operational performance - Adjusted EBITDA is presented as a non-GAAP measure to evaluate operating performance, excluding items like depreciation, amortization, interest, taxes, stock-based compensation, and one-time items[181] Table: Adjusted EBITDA Reconciliation (in thousands) | Adjusted EBITDA Reconciliation (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(3,819) | $(1,334) | | Add back (deduct): | | | | Interest expense | $1,297 | $1,017 | | Amortization of intangible assets | $488 | $489 | | Stock-based compensation | $504 | $94 | | Depreciation and amortization of property, equipment and software | $71 | $57 | | Loss on early termination of line of credit | $0 | $300 | | Income tax benefit | $(200) | $(74) | | Adjusted EBITDA | $(1,659) | $549 | - Adjusted EBITDA decreased significantly from $549 thousand in Q1 2023 to $(1,659) thousand in Q1 2024, reflecting a deterioration in operational efficiency[181] Critical Accounting Estimates and Related Policies This section discusses the significant accounting estimates and policies that require management's judgment and assumptions - No material changes to critical accounting estimates and related policies were reported compared to the Annual Report on Form 10-K for the fiscal year ended December 31, 2023[184] Recent Accounting Pronouncements This section outlines the potential impact of recently issued accounting standards on the company's financial disclosures - The company is evaluating the impact of ASU 2023-09 (Improvements to Income Tax Disclosures) and ASU 2023-07 (Segment Reporting) on its financial disclosures, with effective dates in fiscal years 2026 and 2025, respectively[49][50][51] 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 - The company is exempt from providing market risk disclosures as it qualifies as a 'smaller reporting company'[186] Item 4. Controls and Procedures This section details the company's evaluation of its disclosure controls and internal controls over financial reporting, concluding that both were ineffective as of March 31, 2024, due to identified material weaknesses. It also outlines management's plan to remediate these weaknesses Evaluation of Disclosure Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and procedures as assessed by management - The CEO and CFO concluded that the company's disclosure controls were not effective as of March 31, 2024, due to material weaknesses[187] Management's Annual Report on Internal Controls Over Financial Reporting This section presents management's assessment of the effectiveness of the company's internal controls over financial reporting - Management assessed internal controls over financial reporting as ineffective as of March 31, 2024[191][194] - Material weaknesses were identified in controls over journal entry processes, information technology general controls (ITGC), and the technical evaluation of accounting matters, leading to the restatement of prior interim financial statements[193] Management's Plan to Remediate the Previously Reported Material Weaknesses This section outlines the specific actions management plans to take to address and resolve identified material weaknesses - Remediation steps include enhancing controls over segregation of duties in journal entry processes, access to program and change management in IT, and technical accounting evaluations, with assistance from consultants[195] - The material weaknesses are not considered fully remediated until improved controls have been in place and operating effectively for a sufficient period[196] Changes in Internal Controls Over Financial Reporting This section reports on any changes in the company's internal controls over financial reporting during the period - No other changes in internal controls over financial reporting materially affected or are reasonably likely to materially affect the company's internal controls system during the three months ended March 31, 2024, beyond the discussed material weaknesses[197] Part II. Other Information This section provides additional information not covered in the financial statements, including legal matters and exhibits Item 1. Legal Proceedings This section outlines the material legal proceedings the company is currently involved in, including two consolidated putative class action lawsuits and a lawsuit filed by the company against the author of a defamatory article - The company is a defendant in two consolidated putative class action lawsuits alleging violations of federal securities laws related to false or misleading disclosures[199][200] - The company filed a lawsuit against the author of a defamatory article/blog post published in May 2024, which led to a temporary pause in connection with a key sell-side customer[201] Item 1A. Risk Factors This section indicates that the company's risk factors are not applicable for this quarterly report, referring to the Annual Report on Form 10-K for a comprehensive discussion of risks - Risk factors are not applicable for this quarterly report; readers are directed to the Annual Report on Form 10-K for the fiscal year ended December 31, 2023, for a full discussion[202] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report during the period - No unregistered sales of equity securities or use of proceeds occurred during the period[202] Item 3. Defaults Upon Senior Securities This section confirms that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported[202] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company's operations - Mine safety disclosures are not applicable to the company[202] Item 5. Other Information This section reports that no director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the three months ended March 31, 2024 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the three months ended March 31, 2024[202] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including organizational documents, certifications, and XBRL interactive data files - Exhibits include Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, CEO and CFO certifications (Rule 13a-14(a) and 13a-14(b)), and Inline XBRL documents[204][205] Signatures This section contains the duly authorized signature for the Form 10-Q report - The report is signed by Diana P. Diaz, Chief Financial Officer, on October 15, 2024[207]