Direct Digital Holdings(DRCT) - 2025 Q1 - Quarterly Report

Part I. Financial Information Financial Statements (Unaudited) The company's Q1 2025 financials show a significant revenue decline and widened net loss, driven by a major drop in sell-side advertising Condensed Consolidated Balance Sheet (in thousands) | | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total current assets | $6,881 | $8,535 | | Total assets | $23,817 | $26,006 | | Total current liabilities | $13,478 | $13,350 | | Total liabilities | $47,132 | $45,736 | | Total stockholders' deficit | $(23,315) | $(19,730) | Condensed Consolidated Statement of Operations (in thousands) | | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Total revenues | $8,157 | $22,275 | | Sell-side advertising | $2,028 | $16,500 | | Buy-side advertising | $6,129 | $5,775 | | Gross profit | $2,393 | $4,998 | | Loss from operations | $(3,924) | $(2,807) | | Net loss | $(5,940) | $(3,819) | | Net loss per share (Basic & Diluted) | $(0.35) | $(0.22) | Condensed Consolidated Statement of Cash Flows (in thousands) | | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,708) | $(5,704) | | Net cash used in investing activities | $(15) | $0 | | Net cash provided by financing activities | $3,067 | $3,922 | | Net increase (decrease) in cash | $344 | $(1,782) | | Cash and cash equivalents, end of period | $1,789 | $3,334 | Note 1 — Organization and Description of Business The company operates an end-to-end ad-tech platform with both sell-side and buy-side segments under an Up-C corporate structure - The company provides a full-service advertising platform covering both sell-side and buy-side of the digital advertising ecosystem[19] - The sell-side business (Colossus Media) offers a programmatic platform (SSP) for publishers, while the buy-side business (Orange 142) provides managed advertising solutions[19][20] Note 2 — Basis of Presentation and Consolidation and Summary of Significant Accounting Policies Financials are prepared under GAAP, with revenue recognized on a gross basis and subject to seasonality, alongside a going concern disclosure - The company reports revenue on a gross basis for both sell-side and buy-side segments, acting as the principal in its agreements[27][28] - Revenue is subject to seasonality, with sell-side revenue highest in Q4 and buy-side activity peaking in Q2 and Q3[29][145][151] - For Q1 2025, three customers accounted for 39% of revenues, and two customers accounted for 29% of accounts receivable[44] Note 3 — Long-Term Debt The company holds $41.2 million in long-term debt and amended its agreements in late 2024 to defer payments and secure additional funds Long-Term Debt Composition (in thousands) | | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total long-term debt | $41,212 | $41,212 | | Less: deferred financing cost & debt discount | $(4,212) | $(5,909) | | Total long-term debt, net | $37,000 | $35,303 | | Less: current portion | $(4,122) | $(3,700) | | Long-term debt, net of current portion | $32,878 | $31,603 | - In December 2024, the company secured a new $6.0 million term loan from Lafayette Square, using the funds to prepay other debt and fund an interest reserve[71] - The company was in compliance with all financial covenants under its amended debt facilities as of March 31, 2025[71][80] Note 4 — Stockholders' Deficit and Stock-Based Compensation The company is raising capital via a $20 million equity facility and recorded $0.3 million in stock-based compensation for the quarter - The company is utilizing a $20 million Equity Reserve Facility with New Circle to raise capital[90] - In Q1 2025, the company sold 1.54 million shares for $2.0 million through the equity facility, with more sold after the quarter-end[91] - Stock-based compensation expense was $0.3 million in Q1 2025, down from $0.5 million in Q1 2024[96] Note 9 — Commitments and Contingencies The company is engaged in two major legal cases: a lawsuit it filed over a defamatory article and a defense against a class action lawsuit - A defamatory article in May 2024 caused a major sell-side customer to pause business, leading to a significant disruption in business volumes[111] - The company is the plaintiff in a lawsuit against the author of the defamatory article and is vigorously pursuing its claims[111] - The company is defending a consolidated class action lawsuit from stockholders alleging securities law violations, which it believes lack merit[112] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the severe revenue decline, a 'going concern' warning, and plans to address significant financial challenges - The company received a delisting notice from Nasdaq on April 17, 2025, for not meeting the minimum stockholders' equity requirement[131][132] - Sell-side advertising revenue decreased 88% YoY to $2.0 million due to business disruption, while buy-side revenue increased 6% to $6.1 million[161][162] - Operating expenses decreased by 19% to $6.3 million, primarily due to lower compensation costs from a staff reduction plan[168][169] - The company's financial statements include a 'going concern' warning, citing significant doubt about its ability to continue operations[60][173] - Management's plan to mitigate going concern risks includes cost reductions, raising capital, and working with lenders on debt covenants[61][174] Quantitative and Qualitative Disclosures About Market Risk As a "smaller reporting company," the company is not required to provide information for this item - The company is not required to provide quantitative and qualitative disclosures about market risk because it qualifies as a "smaller reporting company"[194] Controls and Procedures Management concluded disclosure controls were not effective due to a previously identified material weakness in accounting evaluation - The CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of March 31, 2025[197] - A material weakness in internal controls over the technical evaluation of accounting matters, first identified in 2023, has not been fully remediated[198][199] - Management has implemented remediation steps, but these measures have not yet demonstrated operating effectiveness over a sufficient period[199] Part II. Other Information Legal Proceedings The company is pursuing a lawsuit over a defamatory article and defending against a separate consolidated securities class action lawsuit - The company filed a lawsuit against the author of a defamatory article published in May 2024; a motion to dismiss by the defendant was denied in March 2025[203] - The company is defending a consolidated securities class action lawsuit filed in May 2024, which it believes the claims lack merit[204] Risk Factors The primary risk factor is the potential delisting of the company's stock from the Nasdaq for failing to meet equity requirements - A significant risk is the potential delisting from the Nasdaq Capital Market due to non-compliance with the minimum stockholders' equity requirement of $2.5 million[206] - The company received a delisting determination letter from Nasdaq on April 17, 2025, and has appealed the decision[207][208] - Delisting could adversely affect the ability to raise financing, reduce stock liquidity, and result in a loss of institutional investor interest[210][211] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities occurred during the period - The company reported no unregistered sales of equity securities or use of proceeds for the period[212][213] Other Information No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the first quarter of 2025 - No director or officer adopted or terminated a Rule 10b5-1 trading plan during the first quarter of 2025[217]